EQUITIES

LEISURE & HOTELS

Hotels

Keeping it fresh in the bedroom

WHY YOU SHOULD READ THIS REPORT

2 OCTOBER 2018 at 16:40*

Jaafar Mestari Brands, brands, brands… but then hotels is a consumer

Georgios Pilakoutas sector after all. The structural threats from
Saarika Ashoka
disintermediation (online travel agents) and substitution
(Airbnb) only reinforce the need for global hotel chains to
invest in their brand portfolios to differentiate with end
consumers as well as with property owners.

IHG is doing it mostly organically, Accor is buying brands,

Premier Inn (Whitbread) is making tweaks to its UK
positioning… who will come out on top?

We see IHG (initiate with Outperform) as best positioned,

with management delivering at speed and at scale, led by
“avid Hotels” in the US, and with more to come from
initiatives to “evolve the owner proposition”. On Accor and
Whitbread (both initiate with Neutral), we would stay on
the sidelines ahead of upcoming capital markets days.
* Date and time (London Time) on which the investment recommendation was finalised. It may differ from the date and time of broad
dissemination on the website.See Appendix (on p89) for Analyst Certification, Important Disclosures and Non-US Research Analyst disclosures.
 HOTELS

Keeping it fresh in the bedroom

How to spice things up: refresh, repeat, replenish
2 OCTOBER 2018
Hotels have three main options to improve their brand portfolio and drive growth: refresh old
Jaafar Mestari brands, launch new ones, or acquire them through M&A. Following several recent brand
+44 (203) 430 8427 revamps, we see little room for more relaunches. Investors should instead look to organic brand
Jaafar.Mestari@exanebnpparibas.com
launches (which tend to have the best returns) and keep a wary eye on M&A (which tend not to).
Georgios Pilakoutas
(+44) 203 430 8593 Not just going through the motions: the cycle may have further to go
georgios.pilakoutas@exanebnpparibas.com
Today, we appear to be late cycle in the sector in both Europe and the US. But with demand still
Saarika Ashoka strong and supply below red-flag levels, we believe the cycle still has further to go, especially in
(+44) 203 430 8567 Europe, although its recovery has been wobblier and may have more volatile drivers.
Saarika.Ashoka@exanebnpparibas.com

Don’t be afraid of sharing: the threat from Airbnb and OTAs is overrated
Airbnb and OTAs are having an impact everywhere… except listed hotels’ P&L. We build market
Leisure@exanebnpparibas.com share impact scenarios around Airbnb’s 2020 targets, and benchmark commission and marketing
trends at Expedia and Booking, and conclude that hotel chains can continue to absorb the threat.

Three keys in the bowl: American dream, Continental lift, British reserve
IHG (+), heavily exposed to the US, is developing new brands at speed and – for the first time –
at scale. On 18.0x CY20e P/E, it is trading in line with US peer Marriott. We believe this multiple
can expand in a scenario where management accelerates net room openings beyond our 5.2%
base-case forecast.
Accor (=) has been spoilt with cash and focused on brand acquisitions, which we see as lower
returns compared to organic development. At its November Investor Day, the group will detail its
“Augmented Hospitality” strategy, which comes with a risk of small opex-led downgrades, in our
view. On 20.4x CY20e P/E (ex-cash) we would stay on the sidelines.
Whitbread’s (=) strategy of adding brand variations around Premier Inn should help de-risk an
ambitious UK rollout, but we see limited room for surprise. More colour on expansion plans into
Germany will be key. Whitbread trades on 14.4x CY19e P/E (ex-cash), but Merlin (on 15.8x) is a
better benchmark than asset-light hotel groups, in our view.

Accor (=) Intercontinental Hotels (+) Whitbread (=)

Hotels  France Hotels  United Kingdom Hotels  United Kingdom
Price*: EUR44.2  TP: EUR42  Downside: 5% Price*: 4,780p  TP: 5,330p  Upside: 12% Price*: 4,717p  TP: 4,660p  Downside: 1%
Market cap: EUR12.5bn Market cap: USD11.9bn / EUR10.2bn Market cap: GBP8.6bn / EUR9.7bn

12/17 12/18e 12/19e 12/20e 12/17 12/18e 12/19e 12/20e 02/18 02/19e 02/20e 02/21e
EPS, Adjusted (EUR) 1.48 1.49 1.83 1.99 EPS, Adjusted (USD) 2.43 2.95 3.14 3.46 EPS, Adjusted (p) 254.0 191.4 205.2 221.2
EPS, IBES (EUR) 1.30 1.33 1.69 1.98 EPS, IBES (USD) 2.43 2.89 3.18 3.45 EPS, IBES (p) 259.4 265.3 283.2 299.6
P/E (x) 27.3 29.8 24.1 22.2 P/E (x) 21.6 21.1 19.8 18.0 P/E (x) 15.3 24.6 23.0 21.3
Net yield (%) 2.6 2.4 2.6 2.9 Net yield (%) 2.0 1.9 2.0 2.2 Net yield (%) 2.6 1.6 1.7 1.9
FCF yield (%) 6.2 1.9 3.5 4.0 FCF yield (%) 3.5 2.9 3.6 4.6 FCF yield (%) 1.4 1.0 1.5 1.4
EV/Sales (x) 2.9 3.8 3.4 3.1 EV/Sales (x) 2.9 3.1 2.8 2.5 EV/Sales (x) 2.5 2.9 2.8 2.7
EV/EBITDA (x) 14.3 18.2 15.8 14.0 EV/EBITDA (x) 14.2 15.0 13.9 12.4 EV/EBITDA (x) 9.6 9.4 9.2 8.6
EV/EBITA (x) 17.9 22.9 19.6 17.3 EV/EBITA (x) 15.7 16.5 15.3 13.8 EV/EBITA (x) 13.2 12.5 12.2 11.4
EV/CE (x) 2.1 2.1 2.1 2.0 EV/CE (x) 10.1 10.0 8.6 7.3 EV/CE (x) 2.0 1.5 1.4 1.3
Net Debt/EBITDA, Adj. (x) 4.5 1.0 0.6 0.3 Net Debt/EBITDA, Adj. (x) 2.2 1.9 1.6 1.2 Net Debt/EBITDA, Adj. (x) 1.0 - - -
Prices at 28 September
 Contents

Self-check-in ____________________________________________ 3

Investment summary ______________________________________ 4

Stock calls ______________________________________________ 7

The Market: 17 million rooms and counting _____________________ 8

Marketing toolbox________________________________________ 19

New brand launches _____________________________________ 20

Brand re-launches _______________________________________ 27

Brand acquisitions _______________________________________ 34

Online Travel Agents and disintermediation ___________________ 39

Airbnb and alternative accommodation _______________________ 51

Cycle view: “late cycle” can last for a while ____________________ 61

Valuation ______________________________________________ 66

Company Section________________________________________ 72

Appendix ______________________________________________ 85

Investment case, valuation and risks _________________________ 87

Company profiles and financial highlights _____________________ 91

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 2

 Self-check-in

Figure 1: Hotels – Relative valuation

Exane Target Upside P/E* EV / EBIT EV / EBITDA FCF yield Div. yield EPS growth
rating price 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e

Accor = 42.0 -5% 22.2x 20.4x 19.6x 17.3x 15.8x 14.0x 3.5% 4.0% 2.6% 2.9% 23.3% 8.7%
IHG + 5,330 12% 19.8x 18.0x 15.4x 13.8x 13.9x 12.4x 3.6% 4.6% 2.0% 2.2% 6.7% 10.1%
Whitbread = 4,660 -1% 15.5x 14.4x 12.2x 11.5x 9.2x 8.7x 1.4% 1.4% 1.7% 1.8% 7.2% 7.8%
Average 19.4x 17.8x 16.0x 14.5x 13.2x 11.9x 2.9% 3.4% 2.2% 2.4% 13.2% 8.9%

Price Ccy 12m 12m M. Cap. Weekly Stock performance Relative to MSCI Europe
low high (EURm) vols. 1m 3m 12m ytd 1m 3m 12m ytd

Accor 44.2 EUR 40.8 48.6 12,461 30 3% 5% 7% 4% 2% 4% 5% 4%

IHG 4,780 p 3,933 4,966 10,273 20 1% 2% 23% 3% 1% 0% 21% 2%
Whitbread 4,717 p 3,512 4,728 9,713 24 3% 19% 28% 20% 3% 17% 26% 19%
Source: Exane BNP Paribas estimates. All calendarised to end December. Priced as of 28 September 2018 close. *Accor, Whitbread ex-cash P/E

Figure 2: The differentiated work we have done on the key debates

Less property and more competition… what exactly is their value-add?

We have estimated Returns On Investments for 10 large brand launches, re-launches, and
acquisitions, and benchmarked them qualitatively with another 12 operations. We find there
is limited room for new re-launches, so that investors should focus on organic brand
launches and be cautious on M&A. IHG is best positioned with the “avid” launch (p. 19)

What impact will AirBnB have on the market in the next 3 years?

Using press reports and press interviews with AirBnB management, we have built detailed
market impact scenarios based on their 2020 business plan of reaching $8.5bn revenue,
with 3 main inputs around “core” private rental volumes, commission trends, and ancillary
revenue. A best case of moderate AirBnB volume growth is increasingly likely (p. 54)

Is IHG’s targeted acceleration in room openings credible?

We have analysed IHG’s historically low net room openings in the context of wealth
disparities and lending conditions in the US. We conclude that IHG’s initiatives to “evolve
owner proposition” effectively mean the company is picking a fight against “the end of the
American dream”. Look out for new announcements at FY17 results (see IHG note)

Source: Exane BNP Paribas

Figure 3: Six statements you may find controversial

IHG has not done well with large US REITS, at only c. 7% share (p. 17)

Organic brand launches are conjuring up fee revenue out of thin air, with as high as 29% ROIs (p. 20)

Recent M&A has not delivered better than 6.5% - 8.0% ROIs (p. 34)

Online Travel Agents have not been positioned on price since 2014 (p. 45)

AirBnB have already revised their 2020 targets down once (p. 54)

The US cycle can go on and on at “inflation+” RevPAR growth (p. 62)

Source: Exane BNP Paribas

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 3

 Investment summary

An attractive market: 17 million rooms and counting

There were 17 million hotel rooms servicing the c.$500bn global hotel market in 2017.
Growth is underpinned by rising travel and tourism trends. Leveraging their brands and
scale, the listed hotel chains continue to take share. While we are “late cycle”,
underlying demand and benign supply underpin low-single digit RevPAR growth across
the main markets. With most of the listed hotel operators predominantly asset-light
franchisors and managers, the story is all about the top-line: capturing an outsized
share of supply growth and scoring well with individual owners and multi-brand hotel
REITs. We forecast FY18e-FY20e net openings CAGRs of +4.5% for Accor, +4.8% for
IHG, and 5.1% for Whitbread’s Premier Inn.

Figure 4: Fragmented market benefitting from rising discretionary spend and market share gains
Global Hotels market: room count by operator Branded hotels market share (% of hotel revenue)
Marriott 7% 54%
52%
Hilton 5% 49% 50%
46%
Wyndham 5%

IHG 5%

Other Jin Jiang 4%

Unbranded
46%
Accor 4%

Choice 3%
Huazhu 2%
Other BTG Hotels 2%
Chains 15% Best Western 2%

2003 2007 2011 2015 2019E

Source: company data, Exane BNP Paribas estimates based on STR data

The marketing toolbox: IHG delivering at speed and at scale

With RevPAR unlikely to set the world alight, the question for the hotels is how else
they can they accelerate the growth story. We evaluate their three choices:

– New brand launches: let’s do one at scale now. European chains have
launched 6 new brands in the last 6 years, and IHG has been the most active. Most
new launches have matured fast however, and we see no material upside from
Hualuxe, EVEN, Jo&Joe or Hub, which all address specific niches. On the contrary
IHG’s new “avid Hotels” brand has seen spectacular pipeline build-up since its Q317
launch. Provided the brand can make it to c.18,000 signings by December, we would
expect it to deliver 40,000 rooms by 2023e (a +5% boost to IHG’s portfolio).

– Brand re-launches unlikely to be material. Flagship brands across our three

covered companies have each undergone large scale brand revamps in the last 10
years, so that we do not expect major new announcements. Most successful was the
“megabrand” repositioning at Accor where we see 20% ROI, least successful was
IHG’s attempt at refreshing Crowne Plaza in North America, an ongoing headache.

– We are more cautious on Brand acquisitions. The hotel deals of 2014-2016

have failed to show any pipeline acceleration (Accor’s Fairmont and IHG’s Kimpton),
while write-downs on some of Accor’s smaller deals outside of core hospitality suggest
that it may be difficult for hotels to deliver synergies from the wider “travel” ecosystem.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 4

 Figure 5: New brand launches have the best returns, but are often too small
Brand launches, re-launches, and acquisitions – Estimated Return on Investments
29.1%

20.0%
16.1%
14.0% 13.0%
9.0% 8.3%
6.9% 6.5%

[negative]

IHG IHG Whitbread Accor IHG IHG Whitbread IHG Accor Accor

avid Hotel Hub ibis Holiday Crowne Capex Kimpton Fairmont Mantra,
Indigo Inn Plaza program Movenpick

2022e 2007 2013 2012-14 2008-10 2011-15 2015-17 2014 2015 2017

Brand launches Brand re-launches Brand acquisitions

(5-year ROI) (3-year ROI) (3-year ROI)

Source: Exane BNP Paribas estimates

Smelling the coffee: OTAs and Airbnb an absorbable impact

Online Travel Agencies (OTAs) have been taking share on greater mobile adoption
and better range and convenience, and now account for 15%-20% of bookings for the
listed hotel chains, while their marketing budgets trump those of even the largest hotel
chains. However, price parity regulations means OTAs have lost some of their pricing
edge, while hotel chains have been leveraging their local market share and growing
loyalty programmes to bring down commissions. The theoretical impact of OTAs taking
another 5pt market share in the next 5 years would be -1.8% for Accor and -0.7% for
IHG, which we see as absorbable.

Airbnb meanwhile has become the third largest accommodation provider by nights
booked in less than 10 years, with c. 3% market share. We have stress-tested Airbnb’s
reported 2020 targets. In a worst case scenario, the platform could triple their share
and account for 75% of accommodation growth over the next 3 years. However
regulatory hurdles, slower recent momentum, and unproven track record in corporate
bookings leave us more relaxed: there is a best case where growth is rebalanced
towards ancillary revenue and Airbnb’s market share “only” increases to c. 5.5%.

Figure 6: OTA impact has been absorbable so far, Airbnb market share gains likely to slow down
IHG – Bookings* by channel since 2005 Airbnb – Accommodation market share under 2020 targets
100%
Online Travel agents (OTAs)
2017 market share 3.0%

Other third-parties
80%
Online - own Websites / Apps 2020 Best
Diversification
5.5%
60% Call centers etc Increase in fees
$1.0bn ancillary
Hotels direct
2020 Base
40% Balanced strategy
7.5%
Increase in fees
$500m ancillary

20%
2020 Worst
Volume strategy
9.0%
Flat fees
0% Limited ancillary

Source: company data, Exane BNP Paribas estimates * as a percentage of gross system revenue

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 5

 Cyclical healing
The hotels cycle is now 8 years into its recovery from the 2010 troughs. While the US
market optically looks peakish, we point to still solid demand and supply growth below
red flag levels as supportive of “inflation+” RevPAR growth (EBNPP IHG Americas
FY19e +2.0%). Europe is more attractive on paper with +9% upside to peak RevPAR,
although the path to recovery has been wobblier and may rely disproportionately on
volatile Leisure demand in gateway cities (EBNPP Accor Europe FY19e +4.0%). At the
group level, we forecast FY18e-FY20e RevPAR CAGRs of +2.7% for IHG, +3.7% for
Accor, and +0.7% for Whitbread’s Premier Inn.

Figure 7: The US has gone full circle but demand remains strong. Still c. 9% upside to peak in Europe.
US Hotels – Real ADR* and Occupancy Europe Hotels – Real ADR* and Occupancy

68% 74%
Q318 Q318
3
66% 72%
3
64%
Q407 70%
2 Peak
Occupancy (%)
2
Occupancy (%)

62%
68%
Q407
60%
Peak
66%
58%
1 64%
56%
Q110 1
Trough 62%
54%
Q110
Trough
52% 60%
85.0 87.5 90.0 92.5 95.0 97.5 100.0 102.5 105.0 80.0 85.0 90.0 95.0 100.0 105.0
EBNPP Real Average Daily Rate (USD*) EBNPP Real Average Daily Rate (EUR*)

Source: Exane BNP Paribas estimates based on STR data and Bloomberg CPI data. * all in 2007 USD (US) / EUR (Europe), indexed to Q407 = 100

Valuation overview
The three European large cap hotel stocks trade on an average CY20e P/E of 17.8x
(adjusting for cash earmarked for shareholder returns). This is consistent with high-
single digit EPS growth. We see most upside at IHG on 18.0x, with also the strongest
Free Cash Flow yield, and credible net room openings targets driving an EPS growth
acceleration. On the next page we highlight our valuation thinking for each stock.

Figure 8: Hotels – Relative valuation

Exane Target Upside P/E EV / EBIT EV / EBITDA FCF yield Div. yield EPS growth
rating price 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e

Accor = 42.0 -5% 24.1x 22.2x 19.6x 17.3x 15.8x 14.0x 3.5% 4.0% 2.6% 2.9% 23.3% 8.7%
ex-cash* 22.2x 20.4x

IHG + 5,330 12% 19.8x 18.0x 15.4x 13.8x 13.9x 12.4x 3.6% 4.6% 2.0% 2.2% 6.7% 10.1%

Whitbread = 4,660 -1% 23.2x 21.6x 12.2x 11.5x 9.2x 8.7x 1.4% 1.4% 1.7% 1.8% 7.2% 7.8%
ex-cash* 15.5x 14.4x

Average* 19.4x 17.8x 16.0x 14.5x 13.2x 11.9x 2.9% 3.4% 2.2% 2.4% 13.2% 8.9%

Price Ccy 12m 12m M. Cap. Weekly Stock performance Relative to MSCI Europe
low high (EURm) vols. 1m 3m 12m ytd 1m 3m 12m ytd

Accor 44.2 EUR 40.8 48.6 12,461 30 3% 5% 7% 4% 2% 4% 5% 4%

IHG 4,780 p 3,933 4,966 10,273 20 1% 2% 23% 3% 1% 0% 21% 2%
Whitbread 4,717 p 3,512 4,728 9,713 24 3% 19% 28% 20% 3% 17% 26% 19%

Source: Exane BNP Paribas estimates. All calendarised to end December. Priced as of 28 September 2018 close.*Accor and Whitbread P/E ex-
cash: Accor adjusting for remaining EUR1,000m of announced buybacks. Whitbread adjusting for GBP2,880m net cash position in FY20e forecasts.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 6

 Stock calls

Figure 9: Hotels: what has driven share prices since 2012?

IHG vs Accor vs WTB – Share price performance*
H215-H116: Less benign UK supply and higher capex
60 drive Whitbread's cash conversion close to
2012-H115: IHG and Accor perform in line zero and precipitate a derating
55 in the macro recovery,
Whitbread is ahead
50 on stronger rollout
45

40

35

30

25 2017-H118:
H215-H116: Accor catches up on a solid recovery in
20 Accor most affected by France and execution of the real estate sale,
Paris terror attacks US RevPAR ends up surprising to the upside
15

IHG Accor (rebased) Whitbread (rebased)

Source: Factset, Exane BNP Paribas estimates. *GBP, rebased to IHG share price

InterContinental Hotels: Bringing back the American dream

Outperform, TP 5,330p i.e. +12% upside. Trading on 18.0x CY20e P/E
With an improved pipeline and three convincing brand initiatives already announced,
IHG offers attractive earnings growth on our base case: an acceleration from 4.0% to
5.2% net room openings by 2020e fuelling 10% EPS growth. But there is more to
come, with further initiatives to “evolve owner proposition” still to be announced under
the $125m opex investment plan. In a scenario where IHG wins share with both small
and large hotel owners and accelerates openings all the way to 6.5%, there is a total
20% upside to our bull case DCF valuation. This includes a potential re-rating to 19.9x
as IHG could in this scenario grow earnings above US peer Marriott (17.9x). Please
also refer to our IHG note Bringing back the American dream (see here).

Accor: What about focused and narrowed-down hospitality?

Neutral, TP EUR42 i.e. -5% downside. Trading on 20.4x CY20e P/E ex-cash
Accor offers an attractive exposure to the ongoing RevPAR recovery in France and
Continental Europe, as well as solid room openings. But we would stay on the sidelines
ahead of the unveiling of a new strategy dubbed “Augmented Hospitality” this
November: opex investments in digital have often precipitated small consensus
downgrades at Accor, and recent market reaction on Air France talks and digital write-
downs in H118 suggest the all-encompassing “vision” could be an even tougher sell
this time. We would expect Accor shares to trade closer to IHG on 18.0x CY20e P/E.

Whitbread: Capex-driven rollout story trading exactly where it should be

Neutral, TP 4,660p i.e. -1% downside. Trading on 14.4x CY20e P/E ex-cash
The ongoing Premier Inn UK rollout is credible, given management track record of
derisking the openings profile (granular market analysis, extensions, new brand
launches), but this alone is not enough to get involved: similar “zero like-for-like”,
capex-driven rollout stories do not trade much higher (e.g. Merlin on 15.8x). We would
await more colour on the plan to accelerate the expansion into Germany and visibility
on the quantum of cash returns post Costa disposal (investor day in early 2019).

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 7

 The Market: 17 million rooms and counting

– There are 17 million hotel rooms in the world, 39% of which controlled by the top 10
hotel chains. Independents (46%) should continue to lose share to brands.
– Future room openings will be weighted to Asia, Middle East, and Latin America, but
not enough to shift the geographical mix at either IHG (to remain c. 58% Americas) or
Accor (to remain c. 45% Europe).
– Listed operators are now predominantly asset-light franchisors with pure top-line
exposure to the hotel cycle, and the key success factor will be capturing an outsized
share of supply growth and scoring well with large owners and multi-brand hotel REITs.

A fragmented market: European listed majors are global n.4 and n.6
There are 17 million rooms in the world available for overnight stays, with a key waiting
at reception. Hotel chains control the lion’s share of this supply, but the global hotels
market is still relatively fragmented: c. 46% of global room count is operated by
independent (“unbranded”) hotels, and even within the branded supply, no individual
brand owner controls more than 7% of the global room count.

The scale of the top 10 hotel chains ranges from 1.2m rooms for global leader Marriott,
to c. 300,000 for regional leaders Huazhu, BTG, and Best Western. Among European-
listed hotel companies, both InterContinental (c. 800,000 rooms) and Accor (c.
600,000) operate in this global league, while Whitbread’s Premier Inn, with c. 75,000
rooms concentrated in the UK, is a single-market leader more comparable to other
local leaders such as NH Hoteles, Scandic, or B&B.

Figure 10: The top 10 global chains together control 39% of the world’s 17 million hotel rooms
Global Hotels market: room count by operator Top 10 Global Hotel chains by room count (‘000s)
Marriott 7% 1,236
Hilton 5%

Wyndham 5%
848 817 798
IHG 5% 680
616
Other 526
Jin Jiang 4%
Unbranded
46% 380 374
328
Accor 4%

Choice 3%
Huazhu 2%
Other BTG Hotels 2%
Chains 15% Best Western 2%

Source: company data, Exane BNP Paribas estimates based on STR data

Branded hotels are expected to continue to take share, with Euromonitor forecasting
another +2pt increase in the global branded mix by 2019e. While less mature regions
such as China and India are likely to see the most spectacular increases, most
operators also expect brand penetration to continue to tick up in mature countries such
as the USA and the UK.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 8

Figure 11: Branded hotels have been taking share from independents and we expect this to continue
Branded hotels market share (% of hotel revenue) Branded market share (% of rooms) - selected countries
54% 2005 2012 2020F 2030F
52%
49% 50%
73%
46% 71%
69% 69%
67%
64%
60%
57%

48%
44%

38%
35%
32%

23%

nm nm

2003 2007 2011 2015 2019E USA UK China India

Source: Left: Euromonitor. Right: IHG estimates based on STR, McKinsey, BCG data

These figures only cover “Hotel rooms” in their narrow definition, and in a separate
section of this note we analyse the share of accommodation demand captured by
alternative formats (including home rentals through platforms such as AirBnB).

Regions
Within the global hotels market, North America is the largest region by room count with
c. 5.6m rooms, and also boasts the highest chain penetration globally, at c. 70%.

Figure 12: North America is the largest region, and the most penetrated by chains
Global Hotels market: room count by region Chain penetration (% of regional rooms)

Latin
America &
Middle East 70%
12%
USA
& Canada
33% 53%

43%
40%
Asia
Pacific
27%

Europe USA Europe Asia Latin America &

28% & Canada Pacific Middle East

Source: Wyndham Hotels & resorts registration documents based on STR data

As a reflection of this, most of the largest global hotel chains are markedly overweight
North America, which represents 56-85% of room count for Marriott, IHG, Hyatt, Hilton,
Choice and Wyndham. Non-US groups have made modest progress towards capturing
the North America opportunity, and the region represents no more than 4% of room
count for Accor. Chinese player Jin Jiang is notable for having built a material
European position (c. 11% of room count).

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 9

 Figure 13: Most listed operators are overweight North America
Global Hotels - Room count by Region (2017)
100%
5% 8% 5%
8%
16% 7%
15% 20%
18% 10%
27% 6%
9% 9%
14% 7%
6% Rest of the World
87%
97% 100% APAC
85% Europe
52% 74%
67% 69%
64% Latin America
56%
North America

9% 11%
0%

Source: company data. Exane BNP Paribas estimates

Looking ahead, North America is likely to retain its prominence as the largest hotel
market in the world: the region represents 29% of the global industry pipeline, only
slightly below its 33% share of the current global room count. This pipeline is the total
number of hotels rooms currently being planned or built, and generally due to open in
the next 3 to 5 years. The weight of Europe should continue to nudge down (only 17%
of global pipeline vs 28% current share), while unsurprisingly the short and medium-
term openings should be stronger in Asia Pacific (35% of global pipeline vs 27%
current share) and to a lower extent in Latin America, the Middle East, and Africa.

Figure 14: North America retains its share of room openings, while Europe loses out to APAC / ME / LatAm
Global Hotels market: pipeline by region (in number of rooms) Percentage of pipeline at construction stage
Central & 56%
S.America
ME & 6% 51%
Africa
13% North
America
42%
29%
36%
31%

Asia
Pacific Europe
35% 17%
North Europe Asia ME & Central &
America Pacific Africa S.America

Source: Exane BNP Paribas estimates based on STR Hotel Supply Development Update press releases (July 18)

Within European-listed hotel companies, IHG is well-positioned to capture its fair share
of the North America openings. But the company’s bet on China is a focused and
narrow way to tackle the APAC opportunity, and is likely to leave secondary countries
behind. All in all, this means that the group’s exposure is unlikely to change much: we
estimate Americas should still represent 58% of IHG’s system once every room in its
pipeline is open, with greater China only nudging up from 13% to 17%.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 10

 Accor is also positioned for an incremental, rather than radical, mix shift, despite a
wider APAC strategy, a strong foothold in Latin America, and a more decisive
underweight of its legacy Europe region in the pipeline. We estimate that Europe
should move down to only 45% of the Accor system post-pipeline openings, with APAC
ticking up to 31%. As we will discuss in more detail in our section on brand acquisition,
investors could have expected a stronger acceleration of signings in North America:
collectively Americas represent only 13% of Accor’s pipeline, in line with their weight in
the current group mix.

Figure 15: IHG and Accor’s pipeline of openings should not result in radial mix shifts
IHG – Current and projected* room count by region Accor – Current and projected* room count by region

100% 100%
13% 16%
29% 27% 31% APAC
Greater China 47%
25% MEA
25% 8%
Europe
10%
26% Americas
EMEAA

20%
52%
45%
63% 59% Americas
45% 20%

13% 13% 13%

0% 0%
Current Pipeline Future Current Pipeline Future
IHG Accor

Source: company data, Exane BNP Paribas estimates * Future mix = current + pipeline mix

Categories
Hotel pricing varies widely by region, with Average Daily Rates (ADRs) reported by
European listed players ranging from $80 (IHG China) to EUR212 (Accor North
America). More relevant perhaps is price positioning within each region, the main
determinant of a brand’s category. In the US market, data provider Smith Travel
Research (STR) considers all hotels charging between $65 and $110 per night to
belong to the Midscale category, representing 39% of US room count. Criteria vary by
region and rarely overlap with local country definitions of categories (eg. “Stars”).

Figure 16: Midscale and Upscale are the largest categories

US Hotels: room count by category US market: category price points (ADR* range)
Luxury
3%
Economy
21%
>$120

Upscale
37%
$110-$210

$65-$110

<$65

Midscale
Luxury Upscale Midscale Economy
39%
Source: Wyndham Hotels & resorts registration documents based on STR data. * Average Daily rate

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 11

 Among European listed hotel companies, Whitbread’s Premier Inn is a pure UK
Economy player (FY18 ADR GBP63). IHG is overweight the Midscale category through
their key Holiday Inn brand family (FY17 ADR $113). Accor has the widest category
exposure covering Economy (FY17 ADR EUR57, eg. hotelF1), Midscale (EUR87, eg.
the ibis brand family), Upscale and Luxury (EUR155, eg. Novotel, Sofitel, Fairmont).

In relative terms, all European listed players are under-exposed to the Upscale
category, which remains dominated by US players Marriott (Marriott, Sheraton,
Courtyard), Hyatt (Hyatt Regency, Hyatt Place) and Hilton (Hilton, DoubleTree).

Figure 17: IHG is overweight Midscale, Accor covers the entire spectrum
Global Hotels - Room count by Category (2017)
100%

18% 16%
22%

43%
50%
56%

74% 77% 74%

Economy / Budget
62%
100%
Midscale
68% 77%
34%
Upscale

48% 38% Luxury

9%
16% 13%
23% 17%
16%
10% 10% 10% 6%
0% 5%

Source: company data. Exane BNP Paribas estimates

Operating models
A branded hotel can be operated under 4 main models which we summarise in the
table overleaf.

Most major global hotel chains are first and foremost Franchisors (54%-100% of
revenue for IHG, Marriott, Hilton, Choice, Wyndham, Jin Jiang and Huazhu). This
means that a Holiday Inn branded property spotted in the high street has all chances of
being owned by a third party paying for the property, utility, and personnel costs, with
IHG’s direct involvement limited to sending the owner a book (a set of best practices
brand standards) and a flag (branded recognition and inclusion on the brand’s
distribution and marketing channels such as websites and loyalty programs). In turn, in
our franchised Holiday Inn example, IHG’s P&L will only benefit from a royalty fee worth
c. 4% to 7% of the hotel’s room revenue. Note that under IFR15 reporting, European
hotel companies now also consolidate as revenue other fees charged to franchised
hotels, but which are allocated to a “system fund” spent on a 1 for 1 basis and only
generate small timing profits or losses (eg. marketing fees).

Most brand owners also offer a Management model, whereby they take on slightly
more operational responsibility by also sending key management, and in turn are
incentivised to the bottom line of the hotel. While in theory fully applicable to any
category, management models tend to be more prominent in the Upscale and Luxury
categories where control over brand execution matters more to the chain, and where a
higher proportion of food and beverage, corporate events and other non-room revenue
makes the prospect of earning an incentive fee more attractive.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 12

Figure 18: Asset-light Franchise and Management models offer higher margins, lower cash requirements
Hotel operating models – Summary and P&L impact

Owned Leased Managed Franchised

The model Operate a property owned by Operate a property owned by a Send on-site management to License a third party to operate
the company, under one of the third party, in exchange for operate a property owned or their owned or leased property
company's brands. rental payments, under one of leased by a third party, under under one of the company's
the company's brands. one of the company's brands. brands.

Positives Highest control over brand High control over brand Some control over brand Lowest RevPAR sensitivity
execution execution execution
Secure flagship locations / Ability to rapidly scale up new Ability to rapidly scale up new
brand launches signings signings
Potential benefit from asset Upside from F&B and ancillary
appreciation revenue

Negatives Highest macro sensitivity Highest macro sensitivity Incentive fees bring some No direct control over brand
cyclicality execution
High capital requirements High proportion of fixed cash Retention risk Retention risk
costs in P&L
Network mix can be slow to No natural "way out" of leases Pipeline relies on third party Pipeline relies on third party
evolve owners owners

Revenue 100% 100% Management fee: c. 3-4% Royalty fee: c. 4-7%

of room revenue of room revenue of room revenue of room revenue
100% 100% + Incentive fee: c. 8-10% + Marketing fund c. 3-5%
of F&B / ancillary revenue of F&B / ancillary revenue of EBITDAR not consolidated before IFRS15

Costs All unit managers All unit managers Top 4-6 unit managers -
All unit employees All unit employees - -
Utilities Utilities - -
Distribution Distribution Distribution Distribution

EBITDAR c. 20%-30% margin c. 20%-30% margin c. 40-55% margin c. 70-85% margin

Rent - c. 6-9% of revenue - -

- (yield of 4-6% on asset value) - -

Depreciation c. 8-10% of revenue c. 4-6% of revenue - -

(asset over c. 20 years) (fixtures over c. 5-10 years) (not material at unit level) (not material at unit level)

EBIT c. 10-22% margin c. 5-20% margin c. 40-55% margin c. 70-85% margin

Source: Exane BNP Paribas estimates

Together, the Franchised and Managed models are often described as “asset-light”
operating models, while the Owned and Leased models are considered “asset-heavy”
in industry terminology. This reflects both the effective capital requirements and their
sensitivities to like-for-like top-line movements. We estimate that a -1pt change in
Revenue per Available Room (RevPAR) impacts the brand owner’s EBIT by -4%
to -5% for an Owned or Leased hotel, by -2% for a Managed hotel, and by only -1% for
a Franchised hotel.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 13

 Figure 19: Asset-light models are also less impacted by variance in RevPAR
Illustrative sensitivity to -1pt change in RevPAR
Owned Leased Managed Franchised
Base Revenue 100 100 100 100
Operating costs -75 -75 -53 -23
ow Fixed -38 -38 -26 -7
ow Variable -38 -38 -26 -15
Base EBITDAR 25 25 48 78
Rent 0 -8 0 0
Base EBITDA 25 18 48 78
D&A -9 -5 0 0
Base EBIT 16 13 48 78

Revenue at -1pt RevPAR 99 99 99 99

New EBITDAR 24 24 47 77
New EBITDA 24 17 47 77
New EBIT 15 12 47 77
Impact -3.9% -5.0% -1.6% -1.1%

Source: Exane BNP Paribas estimates

In addition, fee revenue from Franchised hotels is solely based on room revenue, and
as such is not subject to the wider variations in other revenue streams, including food
and beverage, corporate events, and other ancillaries, which tend to be more cyclical.

Figure 20: Brand owners receive royalty fees, and also manage a large system fund for sales / marketing
Franchisees – Fees paid to brand owner (% of room revenue) IHG vs Accor – Revenue breakdown
Loyalty fee 100%
c. 0.5%*
Sales & 5%
Marketing
fee
c. 2.0% Royalty fee 50% 50% System Fund /
20% c. 5.5% 59%
Services to owners
55%
revenue*

Fee Business
revenue

50% 50%
41%
Booking
fees
c. 2.0%
20% 0%
IHG IHG Accor
2016 2017 2017

Source: Exane BNP Paribas estimates, company data. *Accor “Services to owners” revenue net of intercompany eliminations

As an illustration of this resilience, we estimate IHG’s historical fee revenue in their

Americas Franchise business has remained stable at between c. 5.5% and c. 6.0% of
system revenue since 2005. This has allowed Franchise EBIT margins to also remain
very stable, in a narrow range of 83% to 88% through 2005-2017.

The Managed fees have been more volatile, reaching as high as 12.8% in 2007 but
coming down as low as 6.1% in 2014. Managed EBIT margins came down from a 2006
high of 35% to a 2009 low of 16% before recovering through the upcycle, and currently
stand at c. 38%.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 14

Figure 21: Franchisors have pure top-line exposure; Managers are more exposed to underlying hotel profits
IHG Americas – Fees as % of system revenue IHG Americas – Fee business EBIT margins
14% 100%

90%
12%
80%
10% 70%

60%
8%
50%
6%
40%

4% 30%

20%
2%
10%

0% 0%

Franchised Managed Franchised Managed

Source: company data, Exane BNP Paribas estimates

Among listed operators, Accor (41%) and Hyatt (61%) are the only two major chains to
have a higher exposure to management contracts than to franchises, which we would
largely attribute to their recent history as real estate owners.

Whitbread’s Premier Inn is a notable exception of a listed Owned and Leased

operator, with the company having never conducted more than small opportunistic sale
and lease-back operations, and still currently rolling out its UK network through a mix of
freehold and leasehold properties.

Figure 22: Listed players are predominantly Asset-Light, Whitbread an exception

Global Hotels - Room count by Operating Model (2017)
100%

33% 30%

54%
69% 73%
78% 78%
92% Franchised
97% 100%

61% Managed
61%

43% Owned & Leased

30% 25%
19% 22%
6% 9% 5%
0%

Source: company data. Exane BNP Paribas estimates

A look at the real estate owners

Having established that hotel chains most often do not own the real estate…who does?
The answer varies by region and by category, and property owners can range from
Institutional Investors to High Net Worth individuals.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 15

 Figure 23: Hotel property owners: a fragmented landscape
Categories of Hotel real estate investors

Source: Algonquin

The hotel ownership landscape is even more fragmented than the hotel market itself.
Accor brands cover 4,530 hotels globally, and the company has in the past commented
that it deals with c. 1,000 property owners, which suggests that the average owner
controls only 4-5 properties. InterContinental’s owner base is even more fragmented,
with company comments pointing to 2-3 properties per owner. At the other end of the
spectrum, we estimate that the top 45 global hotel Real Estate Investment Trusts
(REITs) control no more than 525,000 rooms, or less than 6% of global branded hotel
supply. In the table below we show the top 20 of those, 19 of which are in North
America (Covivio / Fonciere des Murs the only exception), and 9 of which are listed.

Figure 24: The top 20 Hotel REITS control less than 6% of global branded supply
Top 20 multi-brand Real Estate Investment Trusts (REITs)
Rank REIT Rooms Brands Ownership
1 Host Hotels & Resorts 51,977 Multi-brand Listed
2 Hospitality Properties Trust 49,902 Multi-brand Listed
3 Covivio (Fonciere des Murs) 44,446 Multi-brand Listed
4 RLJ Lodging Trust 30,972 Multi-brand Listed
5 Procaccianti Companies 30,000 Multi-brand Private
6 Ashford Hospitality Trust 25,058 Multi-brand Listed
7 HEI Hotels & Resorts 22,043 Multi-brand Private
8 ARC Hospitality Trust 17,483 Multi-brand Private
9 TMI Hospitality 12,938 Multi-brand Private
10 Columbia Sussex Corp. 12,790 Multi-brand Private
11 Sunstone Hotel Investors 12,450 Multi-brand Listed
12 Carey Watermark Investors 1-2 12,241 Multi-brand Private
13 Lasalle Hotel Properties 11,450 Multi-brand Private
14 MCR Development LLC 11,200 Multi-brand Private
15 Xenia Hotels & Resorts 10,852 Multi-brand Listed
16 Summit Hotel Properties 10,751 Multi-brand Listed
17 Rockbridge 10,652 Multi-brand Private
18 Diamondrock Hospitality 9,630 Multi-brand Listed
19 Noble Investment Group 9,624 Multi-brand Private
20 Strategic Hotels Resorts 7,921 Multi-brand Private

Source: company data, Exane BNP Paribas estimates

Despite this fragmentation, we believe that doing well with the REITs is a key success
factor for hotel chains for 3 reasons:
– Strong growth. We estimate that the top 8 listed US Hotel REITS have delivered a
net room openings CAGR of +2.2% between 2011 and 2017, a period over which the
total US hotels market has been adding only c. +1.1% net rooms per annum according
to STR data.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 16

 – Track record of operational excellence. The same sample of US listed Hotel
REITS have improved EBITDAR margins by c. 300bp between 2011 and 2017 with the
top performers at c.+700bp and the worst performers showing no more than -30bp
margin compression.

Figure 25: Dealing with REITS provides brands with strong operational control, above-market room growth
US listed Hotel REITS – EBITDA margins US listed Hotel REITS – Net openings (2011-2017 CAGR)
2011 2017
35% 10%

30% 8%

25% 6%

20% 4%
+2.2%
15% 2%

10% 0%

5% -2%

0% -4%

Source: company data, Exane BNP Paribas estimates

– Weight and scale in key local markets. REITs balance local diversification with
the requirement for scale in each market. Host Hotels & Resorts describe its 40 focus
properties as “iconic and irreplaceable assets” and has 4 properties in California (19%
of EBITDA), 2 in New York (9% of EBITDA), and 4 in Florida (9%of EBITDA), with a
focus on the resort and convention market. Ashford Property Trust derives c. 10% of its
EBITDA from the Washington D.C. metropolitan area, DiamondRock c. 15% from
Boston, RLJ / FelCor c. 19% from California, and in Europe Covivio’s asset value is
24% concentrated in the Paris / Ile De France region. This makes each of these REITs
go-to operators for chains willing to crack these individual markets.

In the charts below we show the brand exposure of the top 20 multi-brand REITS.

Figure 26: Marriott and Hilton’s upscale brands dominate the REIT portfolios
Top 20 multi-brand REITs – Estimated brand exposure Selected multi-brand REITs – Brand exposure by REIT
Other Marriott Hilton Hyatt Wyndham IHG Accor Other
19%
Diamondrock Hospitality

Summit Hotel Properties 7%

Xenia Hotels & Resorts 10%

Accor
5% Marriott
45% Sunstone Hotel Investors

ARC Hospitality Trust

IHG
7% Ashford Hospitality Trust

Wyndham RLJ Lodging Trust

2%
Covivio (Fonciere des Murs) 26%
Hyatt
8% Hospitality Properties Trust 33%

Hilton
Host Hotels & Resorts
14%
0% 20% 40% 60% 80% 100%
Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 17

 Among global brands, we see Marriott as having most successfully fostered a strong
relationship with the major multi-brand hotel REITs: post the Starwood acquisition, we
estimate that the Marriott brand families represent c.45% of room count at the top 20
global hotel REITs.

In contrast IHG (7% share of top 20 REITs) and Accor (5%) could both benefit from
stronger REIT relationships, in our view. There are signs of strong engagement with
selected partners (IHG with Hospitality Properties Trust, Xenia, or Summit, Accor with
Covivio), but we find that these often concern specific brands or regions, and do not
compete on the core North America Upscale segment.

Note that there are also notable exceptions to our general assessment of major chains
being asset-light. Those include the asset-heavy Motel 6, Drury, and Gaylord (now
Marriott) brands, or situations of “almost not owning the real estate” such as the
recently separated AccorInvest (still 35.2% owned by Accor), Park Hotels & Resorts
(listed, ex-Hilton), and the 19,000 rooms still owned by Hyatt until completion of their
asset recycling program.

Figure 27: AccorInvest has become the second largest mono-brand REIT post
sale
Top 5 Mono-brand hotel property owners
Rank Owner Rooms Brands Ownership
1 G6 Hospitality 63,272 Motel 6 Private
3 AccorInvest 47,824 Accor brands Private
2 Park Hotels & Resorts 32,000 Hilton Listed
5 Drury Hotels Co. 18,835 Drury Private
4 Hyatt Hotels 18,772 Hyatt brands Listed
5 Ryman Hospitality Properties 8,609 Marriott brands Listed
Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 18

 Marketing toolbox

– What should they do with the cash? We see organic brand launches as offering the
highest returns and the clearest differentiation. We believe IHG’s launch of “avid” could
be the unicorn in this cycle: as smart and savvy for owners as it is for customers,
addressing a clear niche in pricing, and showing an exciting pace of signings.
– Brand re-launches and refurbishments strike the right balance between scale and
returns, but we do not expect re-launches to be a prominent feature of this cycle given
that key brands have all recently been addressed at each of our covered companies.
– M&A offers the lowest potential returns but has the advantage of being suitable to
deploy large amounts of capital. Recent deals may be delivering on synergy targets,
but could fail to bring the pipeline boost that is the sign of truly successful hotel M&A.

In the following sections we explore three of the marketing tricks that hotel companies
can pull out of their hats to enhance a dull macro / RevPAR story. We believe that the
key to success will be finding the right balance between what will likely generate high
returns (but is often too small to move the needle for the group), and what can be done
at scale (but is at risk of showing disappointing returns).
– Brand launches consist in creating new hotel brands to better address promising
categories (lower Midscale: IHG’s avid), geographies (London: Premier Inn’s Hub), or
customer segments (millennials: Accor’s Jo&Joe).
– Brand re-launches are large scale, group-wide marketing initiatives aimed at
boosting the revenue performance of an existing brand by implementing new standards
and piloting the associated capex investments to refresh the property portfolio and
create a new impression on customers (IHG relaunched Holiday Inn, Accor ibis).
– Brand acquisitions involve addressing gaps in the group’s brand portfolio
inorganically, by buying the brand and management rights of an existing hotel
company, the rationale often revolving around the time arbitrage and low chances of
success of organic launches, and the potential to also deliver cost synergies.

Figure 28: New brand launches have the best returns, but are often too small
Brand launches, re-launches, and acquisitions – Estimated Return on Investments
29.1%

20.0%
16.1%
14.0% 13.0%
9.0% 8.3%
6.9% 6.5%

[negative]

IHG IHG Whitbread Accor IHG IHG Whitbread IHG Accor Accor

avid Hotel Hub ibis Holiday Crowne Capex Kimpton Fairmont Mantra,
Indigo Inn Plaza program Movenpick

2022e 2007 2013 2012-14 2008-10 2011-15 2015-17 2014 2015 2017

Brand launches Brand re-launches Brand acquisitions

(5-year ROI) (3-year ROI) (3-year ROI)

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 19

 New brand launches

– European chains have launched 6 new brands in the last 6 years, and IHG has
been the most active. Most new launches have matured fast and we see no material
upside from Hualuxe, EVEN, Jo&Joe and Hub, which all address specific niches.
– On the other hand IHG’s avid has seen spectacular pipeline build-up since its Q317
launch. Provided the brand can make it to c.18,000 signings by December, we would
expect it to deliver 40,000 rooms by 2023 (a +5% boost to IHG’s portfolio).

Lots happening, but small scale so far

The last six years have seen a number of organic hotel brand launches across the
listed players. The appeal of creating a new hotel brand is clear: leverage existing
commercial network, brand expertise and owner’s address book to accelerate signings
by targeting incremental, non-cannibalising, and ideally high growth segments.

IHG have been most prolific in this area, starting in 2012 with the HUALUXE and EVEN
hotels launches, and more recently have announced new launches in the mainstream
and upscale segments: avid hotels in 2017, and voco in 2018. Accor launched hostel
brand Jo&Joe in 2016.

Hub by Premier Inn is the only recent organic launch to already account for more than
1% of its owner’s current portfolio, and we believe avid is the only recent organic
launch that has the potential to represent c. 5% of IHG’s portfolio by 2023e.

Figure 29: European listed companies have launched 6 new brands in the past 6 years, IHG was most active
European listed Hotels – Brand portfolio by category (% of rom count) and most recent brand launches
InterContinental Accor Whitbread Main competitors

Luxury Regent 0% Raffles 0% - JW Marriott

3% of US rooms InterContinental 8% Fairmont 5% The Ritz-Carlton
Kimpton 2% Sofitel 5% Waldorf Astoria
HUALUXE 0% Park Hyatt
Andaz

Upscale Crowne Plaza 14% Pullman 6% - Marriott Hotels

37% of US rooms Hotel Indigo 1% MGallery 2% Sheraton
EVEN Hotels 0% Swissotel 2% Hilton
voco 0% Grand Mercure 2% Hyatt Regency
The Sebel 0% Wyndham
Rixos 1% JI Hotel

Midscale Holiday Inn 29% Novotel 15% - Four Points

39% of US rooms Holiday Inn Express 33% Novotel Suites 1% Hampton by Hilton
Staybridge Suites 3% Mercure 16% Ramada
Candlewood Suites 4% adagio 1% Comfort Inn
Other 4% Mama Shelter 0% Quality Inn
avid 0% Multi-brand 1% Starway

Economy - ibis 24% Premier Inn 98% Super 8

21% of US rooms ibis Styles 7% Hub 2% Days Inn
ibis budget 9% Travelodge
adagio access 1% Econo Lodge
hotelF1 2% Jin Jiang GDL
Jo&Joe 0% HanTing

Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 20

 One exception: avid could reach 40,000 rooms in Americas by 2023e
avid was launched by IHG in September 2017 to address a gap at the bottom end of
the US midscale market, not currently addressed by the Holiday Inn brand family.
Promoted by management as ‘the basics done extremely well’, the new brand is
positioned at a 10-15% discount to the current Holiday Inn Express price point of c.
$113. Early signings have been strong, and there were 8,847 committed avid rooms in
the IHG pipeline in Q118 (within 6 months of launching). This has continued to grow to
11,650 in H118, and overall avid has supported IHG’s strongest Q1 and Q2 signings
pace in over a decade. Based on this very strong momentum, we would expect avid to
end the year with between 15,000 and 20,000 rooms in the pipeline.

Figure 30: The pace of signings at avid has been spectacular; we expect 18,000 rooms signed by end 2018
avid – Pipeline progression from launch New brand launches – Pipeline progressions from launch*
600
EVEN hotels*
17,784
avid potential (EBNPP)
500
HUALUXE
14,721
Hub by Premier Inn
400
11,658

8,847 300

200
4,043
100

0
0
Launch Reported Reported Reported EBNPP EBNPP Launch Yr+1 Yr+2 Yr+3 Yr+4 Yr+5 Yr+6
Q317 Q417 Q118 Q218 Q318e Q418e

Source: company data, Exane BNP Paribas estimates. * indexed to Year 1 signings = 100, EVEN Hotels North America pipeline only

The first avid hotel is set to open in Q318, less than a year following launch, but we
would expect the bulk of the first wave of openings to happen in year 3 in line with new-
build brands, and avid to subsequently grow to over 40,000 rooms in year 6 after the
pipeline stabilises at c.35,000 rooms, with c. 8,000 room openings per annum as early
as 2020e.

Figure 31: We expect avid rooms to start opening 2018-2020, reaching 40,000 rooms by 2023e (year 6)
avid – EBNPP potential
Launch +1yr +2yrs +3yrs +4yrs +5yrs +6yrs
Q317 Q417 Q118 Q218 Q318e Q319e Q320e Q321e Q322e Q323e
Room pipeline - 4,043 8,847 11,658 14,721 24,785 27,699 26,520 25,362 24,217
% change - - 119% 31.8% 26.3% 68.4% 11.8% -4.3% -4.4% -4.5%
Hotel signings in period - 44 51 31 35 120 115 110 105 100
Number of rooms open - - - - 87 823 8,259 19,338 29,946 40,091
Net room openings - - - - 87 736 7,435 11,080 10,608 10,145
as a % of n-1 pipeline - - - 0% 2% 5% 30% 40% 40% 40%
Source: company data, Exane BNP Paribas estimates

Similar to other launches, avid will open first in the Americas region before expanding
globally, and will be comprised of all new build properties. To sense-check our
estimates, we have assessed a number of other organic brand launches both by IHG
and other peers in order to set a precedent for the potential acceleration of the avid
pipeline and room openings over the medium term. Though it sits within a separate
sub-category to avid (wellness vs economy), we consider EVEN as the best precedent
to assess the pipeline and room growth trajectory for avid given the similarities in
geography at launch (US) and type of property opened (new builds).

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 21

 Figure 32: Our avid forecasts are not demanding compared to recent launches
New brand launches – Room openings progression from launch
1600 Hotel Indigo
Hub by Premier Inn
1400
HUALUXE
1200 EVEN hotels
avid potential
1000
(EBNPP)

800

600

400

200

0
Launch Yr1 Yr2 Yr3 Yr4 Yr5 Yr6
Source: company data, Exane BNP Paribas estimates3 * indexed to year 1 openings = 100 for conversion
brands ie Hotel Indigo, and to Year 3 openings = 100 for new build brands i.e. Hub, Hualuxe, EVEN, avid.

On the H118 conference call, CEO Keith Barr commented that the signings momentum
at avid was “far ahead” of management’s initial expectations, with owner reaction
having been “phenomenal”. Currently 75% of avid signings are coming from existing
Holiday Inn Express owners who, having secured a new build opportunity, are looking
to add a brand with no cannibalisation risk and with efficient build costs and simple
operating model. A survey from the IHG owners’ association suggests that signings
from existing owners could remain a key driver of the avid pipeline, with 52% of owners
expressing an interest in exploring development of avid hotels or learning more about
the brand in week one of the launch.

Figure 33: avid is popular with existing IHG owners, and fills a clear gap in the lower midscale market
Existing IHG hotel owners awareness of avid launch* US Midscale / Economy brands: price point concentration**

900,000
No, was not Yes, and will
aware explore 800,000
avid
17% development target ADR
Number of rooms within +/-5%

26% 700,000 $96-$101

600,000

500,000

400,000

300,000

200,000
Yes, but
have no
interest Yes, and 100,000
31% would like to
learn more 0
26% 50 60 70 80 90 100 110 120 130 140
Average ADR, 2017

Source: IHG Owners association survey * “Were you aware that IHG announced a new midscale brand this week called avid hotels? Which of the
following best describes your awareness?”. ** global number of rooms within +/-5% of price point (Marriott, Hilton, IHG, Choice, Wyndham brands)

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 22

 From a more top-down perspective, we do not believe that IHG will be stepping into a
particularly crowded space with avid. We estimate that the top 5 US chains have only
c. 80,000 rooms within +/-5% of avid’s target price point of $96-$101. This “sweet spot”
remains well within the consensual definition of the Upper Midscale segment (STR
ADR range $90-$110), and is just ahead of Choice Hotels’ Comfort Inn and Comfort
Suites (combined room count 170,000, FY17 ADR $94.2 / $97.0 respectively), and just
below IHG’s own Holiday Inn and Holiday Inn Express brands (combined room count
495,000, FY17 ADR $112.6).

Is launching a new brand just conjuring up new fee revenue streams out of thin air?
There is a cost to the avid launch, and all in all we estimate the avid launch will
generate a ROCE of 29.1% by year 5.

On the revenue side, we use our year 5 assumption of c. 30,000 rooms, a RevPAR of
$65.8 in line with the announced 10-15% discount to Holiday Inn Express, and the
disclosed 5.0% avid royalty fee.

On the cost side, IHG has identified $125m of cost savings to be delivered over 2018-
2020, that it expects to entirely be “reinvested into the business to drive growth”. Within
those $125m, $50m will be dedicated to “evolve the owner proposition” and “add new
brands”, and we see this total $50m figure as a conservative proxy for the cost of
launching avid (it will cover avid, voco, and any new brands by 2020). We
conservatively also assume that the $10m opex investments in sales and commercial
development resources in the US Franchise division in 2017-2018 will remain in the
P&L in the medium-term, leading to our assumed margins being well below the 80%
average Franchise margin in the Americas division.

Figure 34: We believe the avid brand launch can generate 29% ROI
avid hotels brand launch – Potential ROCE by 2022e (year 5)
RevPAR Number of rooms System revenue
2022e potential $65.8 29,946 $719m

Fee % share 5.0%

Revenue uplift for IHG $36m
Margin 52.2%
Tax 22.5%
NOPAT $15m
Return on EBNPP $50m investment 29.1%

Source: Exane BNP Paribas estimates

IHG is also trialling voco in Europe to tap into conversion opportunities

In June 2018 IHG also announced the launch of voco, an upscale brand with a focus
primarily on conversions, i.e. rebrandings of existing properties under an IHG brand (as
opposed to new build properties built with a brand in mind). The brand is anticipated to
boost IHG’s upscale offering and is to begin in the EMEAA region. We see the Hotel
Indigo brand serving as the best precedent with which to assess voco based on
conversions and target segment. This suggests that voco could have its first properties
rebranded within a year, much faster than for new-build driven brand launches.

We would expect voco to remain of a smaller scale than avid: on the H118 conference
call CEO Keith Barr mentioned the potential to rebrand over 200 hotels to the voco
brand in the next 10 years, with the brand primarily targeting “owners of high quality
hotels not yet part of a major chain”. Assuming a straight-line openings profile and c.
200 rooms per property in line with major upscale brands, this would translate into a
potential c. 4,000 room openings per annum.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 23

 This should be a useful addition to the IHG brand roster, which has lacked conversion-
focused brands, in our view. Competitors Hilton and Marriott each boast 3-5 upscale
conversion brands, and conversions represent c. 32% of net room openings for Hilton,
and “15-20%” for Marriott.

Figure 35: IHG needed to boost its Upscale conversions offering

Conversion brands at major hotel chains
IHG Hilton Marriott
Hotel Indigo DoubleTree Luxury Collection
voco [new] Curio* Autograph
Tapestry* Tribute
Delta
Four Points

Source: Exane BNP Paribas estimates. * described by management as “well positioned for conversions”

Conversion brands have three main benefits:

– Unlocking quirky / individual assets. Conversion brands have looser brand
standards and offer owners a range of options to retain their asset’s identity and local
flavour, including soft branding (eg. “Hotel XYZ, a Luxury Collection Hotel”). This allows
them to accommodate any high-potential properties that may not fit within an existing
upscale brand, and could help accelerate brand penetration in regions with high
independent share (eg. Europe 60%).
– Quick signing-to-opening cycle. Conversion brands target hotels that are already
up and running, and as such can be signed and re-flagged under the new brand
virtually overnight (we estimate c. 6 months in the pipeline, compared to 3-4 years for
other properties). As an illustration, signed conversions currently represent only 2% of
Marriott’s pipeline, but management still expects conversions to continue to represent
“15% to 20%” of openings in the medium term.
– Counter-cyclical signings profile. Conversion activity accelerates in the
downcycle and late cycle, helping hotel chains maintain a level of signings that would
not be sustainable through new builds only. Hilton has opened as much as 57% of its
annual net room openings through conversions in the down years (2011-2012) while
new build signings were still only ramping up.

Figure 36: Conversions have been a material part of Marriott and Hilton’s industry-leading room openings
Marriott – Pipeline by development stage* (Q218) Hilton – Net unit growth and percentage of conversions
Conversion 60,000 60%
N.B. 2%
Approved
9% 50,000 50%

40,000 40%

N.B. 30,000 30%

Under
construction
46% 20,000 20%

10,000 10%
N.B.
Signed
43% 0 0%

% conversion Net unit growth

Source: company data, Exane BNP Paribas estimates. *N.B. = new build, Approved = approved but not formally signed yet

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 24

 Other brand launches and precedents
In the following section we discuss previous brand launches that we have used as
precedents to assess the potential pace and eventual scale of the avid launch, as well
as smaller or already more established brand launches by Accor and Whitbread,
namely Jo&Joe and Hub by Premier Inn.

Figure 37: Other recent brand launches focused on niches will remain sub-scale
New brand launches compared
IHG IHG IHG IHG IHG Premier Accor
Inn
Hotel EVEN HUALUXE avid voco Hub Jo&Joe
Indigo hotels

Launched 2004 2012 2012 2017 2018 2013 2016

Segment Boutique Wellness Luxury Mainstream Upscale Economy Economy
ADR $156 $236 $52 $96 tbc $86 tbc
New build / Conversion C NB NB NB C NB / C n/a
Geography at launch US US China US EMEAA UK Cities France
Current n. of rooms 10,200 1,200 2,100 - - 1,800 100

Source: company data, Exane BNP Paribas estimates

IHG - Hotel Indigo 2004. Hotel Indigo was launched as a boutique concept designed
to reflect the local culture and history of the surrounding area. Though the launch
included some new builds the brand has predominantly been conversions, a reflection
of the bespoke nature of each property and the fact that there is no requirement for
homogenous size or design across the brand portfolio. Hotel Indigo has therefore
seen rapid growth in rooms, the first having opened within 1 year following launch
compared to an average of 3 years for new builds. Although rollout began in the
Americas region, expansion to other geographies came just under 5 years following the
initial launch. As at 6 years following launch, the number of rooms in the portfolio
represented 18.8x the pipeline at year 1, far exceeding any other organic brand
launches assessed across IHG and its peers.

We estimate that Hotel Indigo generated a total system revenue of $224m in 2012 (ie
by year 5), consistent with IHG’s disclosure of 165m system revenue in 2011 (ie by
year 4). In 2007, IHG management initially guided at c. $100m to be invested to launch
Hotel Indigo “over the medium term”. A total $65m was spent between 2007 and 2009
for “key market entry”, and a further $21m in 2011. With simple assumptions on
margins reflecting a mix of franchise (c. 80% margins) and managed (c. 45% margins)
and tax, we arrive at an estimated year 5 ROCE of 9.0% for the Hotel Indigo launch.

Figure 38: Hotel Indigo had less attractive returns due to the need for key capital
Hotel indigo brand launch – Estimated ROCE in 2012 (year 5)
RevPAR Number of rooms System revenue
2012 contribution $108.3 5,661 $224m

Fee % share 6.5%

Revenue uplift for IHG $15m
Margin 73.1%
Tax 27.4%
NOPAT $8m
Return on EBNPP $86m investment 9.0%

Source: Exane BNP Paribas estimates

Compared to the our avid scenario of 29.1% year 5 ROCE, the more capital-intensive
nature of the Hotel Indigo launch stems from the higher-end positioning of the brand
and from the nature of the signings (mostly conversions) and properties (boutique
hotels) requiring more direct investments in key money to secure locations.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 25

 IHG - EVEN Hotels 2012. EVEN was introduced as a response to consumer demand
in the US for healthier travel at a mainstream price. With a particular focus on health
and wellness, the brand was promoted as a key driver of market share growth in the
US for IHG as the wellness trend in recent years has continued to gain in popularity.
Three years following the launch, the brand opened its first hotel, and a further 3 years
later (to present day) has accelerated number of rooms by 4x, and room pipeline in the
US by almost 6x.

IHG - HUALUXE 2012. The first upscale brand launch designed specifically for the
Chinese traveller, IHG launched HUALUXE to respond to perceived demand for a
brand which reflects Chinese local tradition and customs. The trajectory of room
openings appears broadly in line with other new build launches during the first 6 years
following launch. However after a strong initial pipeline within 1 year of c.5000 rooms,
pipeline growth remained broadly at this level over the following 5 years, and number of
rooms after 6 years is 0.4x initial room signings, the lowest of all the brand launches
assessed.

Whitbread - Hub by Premier Inn 2013. ‘Compact, contemporary and connected’,

Whitbread’s launch of Hub by Premier Inn is a budget concept designed for city centres
to offer the convenience of a Premier Inn in a small package and at a more affordable
price. Launched in the UK, the brand is targeted at large cities. As with other new build
launches, the first property opened after 3 years, and since then has accelerated
tenfold by year 5. But Hub may have already played its role in boosting Premier Inn
signings in more expensive areas, and the pipeline has come down from a peak of
2,400 rooms in 2016 to now only 1,300 as openings have materialised, suggesting a
sharp deceleration in the pace of signings since launch. We would expect Hub to reach
c.2,000 - 3,000 rooms by FY20. Adjusted for the investments in new openings, Premier
Inn’s underlying returns have improved through the launch of Hub, so that we believe
the brand has generated returns above the targeted “at least 13%”.

Accor - Jo&Joe 2016. The brainchild of AccorHotels, Jo&Joe is an open house

concept specifically targeting millennials. The 2020 goal at launch was for 50 open
houses, or 15,000 rooms in 10 countries. At present (2 years following launch), the
brand has 1 property in operation in Hossegor, France (98 rooms), with another in
Paris expected to open late-2018. In this context the 2020 objectives may start to look
overly ambitious.

Figure 39: Our avid forecasts are not demanding compared to recent launches
Year 6 number of rooms compared to early Pipeline signings / openings
18.8x

10.8x

8.6x
7.4x
5.4x 4.9x
4.2x
2.7x
1.3x
0.4x
Indigo

HUALUXE

Indigo

HUALUXE
(EBNPP)

(EBNPP)
by P.I.

by P.I.
Hotels

Hotels
EVEN

EVEN
Hotel

Hotel
Hub

Hub
avid

avid

Year 6 number of rooms Year 6 number of rooms

as a x of Year 1 pipeline as a x of Year 3 number of rooms

Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 26

 Brand re-launches

– Both IHG and Accor have relatively recently “re-launched” their Midscale and
Economy brand families, respectively Holiday Inn in 2007 and Ibis in 2012, so that we
would not expect any new announcements on the core brands.
– IHG still has work to do on Crowne Plaza, and we see the current “soft relaunch”
Accelerate Program as susceptible of improving owner engagement.
– Whitbread has stepped up capex at Premier Inn over 2016-2017, but we see a risk
that more investments may be required to help relative RevPAR performance.

Large multi-brand hotel chains have the ability to drive large scale shifts in brand
positioning and brand standards by starting “re-launch” programs for some of their
existing brands. The rationale is to put both company money and owner money to work
and ultimately delivering a RevPAR premium. On top of the initial investment however,
re-launches can also cost the brand some of its scale as higher standards and short-
term investment requirements may push some owners out.

IHG - Holiday Inn - Global re-launch 2008-2010

Holiday Inn is IHG’s core Midscale brand and represents 62% of the company’s portfolio,
with c.495,000 rooms across its Holiday Inn and Holiday Inn Express sub-brands. In
October 2007, IHG announced a “$1billion relaunch” of their core Holiday Inn brand
family (i.e. the Holiday Inn and Holiday Inn Express brands). This figure refers to the total
investment across the system, most of which was borne by the property owners. The re-
launch was executed over three years, with refurbishments until 2010.

This was an opportunity to establish clearer and more differentiated positionings for the
two sub-brands, in our view. The first Holiday Inn Hotel opened in 1952, and Holiday
Inn Express was launched in 1991 to offer “smart and simple travel”. We would contend
that difference between the Holiday Inn and the « Express » proposition may have
been less obvious to customers before the re-launch.

Figure 40: IHG has tweaked the Holiday Inn / Express brand positioning in 2007
IHG – Holiday Inn brand family global relaunch and positioning

Source: Exane BNP Paribas estimates

Beyond logo changes, the re-launch helped establish clearer brand standards that
position Express as the ”savvy” alternative to the classic Holiday Inn offer in terms of
room sizes (19 sqm vs 24 sqm), public areas (no meeting rooms but higher capacity
restaurants), or amenities (no bathtubs) as detailed in the table overleaf. We find that
many of these learnings are now being used as part of the avid launch discussed in the
previous section.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 27

Figure 41: HI vs Express proposition: now clear on paper, but possibly more owner- than customer-oriented
Holiday Inn vs Holiday Inn Express – brand requirements
Holiday Inn Holiday Inn Express
Average Daily Rate, Americas $112.61 $112.64
Average Daily Rate, Europe $94.54 $65.60
Positioning Find comfort from familiarity Unpretentious
Thrive on connections Smart & Savvy
Well-grounded Seek great value
Prioritise family Value independence
Location City, Airport, Suburban City, Airport, Suburban
Number of rooms 75+ 49+
Average room size 23.0 - 26.0 sqm 18.0 - 19.5 sqm
Bathroom 3 piece, minimum 20% bathtubs 3 piece, bathtubs not permitted
Air conditioning Required Required for new build and Southern Europe
Executive rooms 5% - 25% of room count, minimum of 5 Not applicable
Suites Optional, up to 15% of room count Not applicable
Interconnecting rooms 10%+ Not applicable
Restaurant Required, covers c. 60% of room count Required, covers >75% of room count
Conference & meetings Required, minimum 1 room of >35 sqm Not applicable
Gym facilities Required, swimming pool optional Not permitted
Corridors >1.4m wide / >2.3m ceiling height >1.3m wide / >2.3m ceiling height

Source: IHG Commercial Development brochure, Europe, 2017-2018

The relaunch was a commercial success, and the Holiday Inn brand family achieved a
10% RevPAR premium to the US Upper Midscale segment by 2012. This was better
than initial IHG expectations: at the end of the “pilot phase” on 11 hotels in 2008,
management had reported a +5% RevPAR uplift. Importantly this RevPAR
outperformance was achieved through a very tough trading environment, with the
relaunched Holiday Inn properties consistently outperforming their comparables
throughout 2009, and well into the upturn to positive RevPAR performance in 2010.

Figure 42: The Holiday Inn relaunch has driven c. 9% RevPAR outperformance through tough trading
Holiday Inn RevPAR index vs US Upper Midscale Holiday Inn – year-on-year RevPAR change

<<< Relaunch >>> 10%

5%
108 109 110
107
102 104
0%

-5%

-10%

-15%

-20%

-25%

Relaunched Not relaunched

2007 2008 2009 2010 2011 2012

Source: company data, Exane BNP Paribas estimates

Not every property owner embraced the new standards and the required investments,
though. We estimate that IHG had to remove a total c. 6% of global Holiday Inn rooms
above the company’s usual pace of exits through 2008, 2009, and 2010. Holiday Inn
removals peaked at 25,000 in 2010, of which we estimate c. 15,000 were directly
attributable to the re-launch. This illustrates IHG’s focus on quality and consistency,
and the company’s ability to execute at scale: as the re-launch gathered pace from 84
hotels in 2008 to 1,600 hotels in 2010, rebranded hotels maintained a material RevPAR
premium and eventually the small residual of non-relaunched properties was operating
at a -18% RevPAR discount to relaunched hotels.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 28

Figure 43: The indirect cost of the relaunch: a clean-up of c. 6% of the room portfolio
Holiday Inn Americas – Room exits Holiday Inn RevPAR index through re-launch
2007 2008 2009 2010 2011
107 108
104
98 99
89

1,028 hotels

1,641 hotels
1,438 hotels
2,296 hotels
84 hotels

841 hotels
-10,991

-15,559

-19,310
-20,822
Sep-08 Sep-09 Mar-10
Relaunched Not relaunched
-25,381
Source: company data, Exane BNP Paribas estimates

IHG guided at a $60m cost for the Holiday Inn relaunch, but we note that press reports
also suggested a significant budget was already spent before the official
announcement (Business Traveller on 9 April 2008 mentions c. $20m in market
research). On the basis of a total $80m investment therefore, we estimate that the fee
revenue uplift to IHG delivered a 16.1% return on investment, with the +9.0% RevPAR
outperformance only partly offset by the -6.0% churn.

Figure 44: We believe the Holiday Inn relaunch generated c. 16% ROI
Holiday Inn Global re-launch – Estimated ROCE (2008-2010)
RevPAR Number of rooms System revenue
2007 actual $65.6 413,230 $9,895m
Change +9.0% -6.0% +2.5%
2010 pro-forma $71.5 388,436 $10,139m

Net system revenue uplift $243m

Fee % share 6.8%
Revenue uplift for IHG $17m
Tax 22.0%
Return on EBNPP $80m investment 16.1%

For existing owners 837

Net of IHG share 780
Tax 22.0%
Return on $1,000m investment 60.9%

Source: Exane BNP Paribas estimates

As mentioned above, the headline “$1bn” cost is the cost to owners. While a large
figure, this implies “only” c. $315k per hotel, and management comments suggested a
minimum $100k commitment per hotel required to retain the brand. On this basis, the
revenue uplift from a +9.0% RevPAR uplift represents a 1.6 year payback for owners,
also an attractive proposition.

IHG - Crowne Plaza - Americas re-launch 2011-2015

Crowne Plaza is IHG’s business-travel oriented Upscale brand and represents c. 14%
of the company’s portfolio, with c. 105,000 rooms. The brand is positioned around
slogans such as “Making Business travel work”, and “Traveling for Success”.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 29

 In February 2011, IHG announced a relaunch of Crowne Plaza in the Americas region, to
be executed over 5 years (2011-2015). Management’s assessment of the brand
positioning in the Americas suggested, firstly, the need to reposition towards higher and
more consistent brand standards focused on the needs of the core business travellers
demographic (work areas, business lounges, better WiFi); and secondly an opportunity to
close part of the RevPAR gap with Crowne Plaza’s more successful European properties.

Compared to the Holiday Inn relaunch, there was a much stronger focus on cleaning up
the portfolio and removing any hotels deemed to be damaging to brand equity. We
estimate that IHG removed c. 14.5% extra rooms above their normal pace of exits for
the brand through 2011-2015. Commercially the relaunch was a modest success, and
Crowne Plaza Americas achieved a +4.5% RevPAR outperformance to its comparable
Upscale market by 2015.

Figure 45: The Crowne Plaza relaunch was a stretch: modest RevPAR outperformance, more hotels leaving
Crowne Plaza US RevPAR index vs US Upscale Crowne Plaza Americas – Room exits
<<< Relaunch >>> 2011 2012 2013 2014 2015 2016 2017

103 105
100 100 101 -856

-1,858

-2,647 -2,580

-3,326
-3,650

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 -8,212

Source: company data, Exane BNP Paribas estimates

We estimate that the Crowne Plaza relaunch cost IHG c. $100m, mostly across
marketing spend and key money to retain key properties (flagged at c. $30m in 2013).
Given the scale of the exits, we do not believe that the relaunch had a positive return
for IHG, with a likely revenue impact of -$8m in our estimates as the system shrunk.

Figure 46: The Crowne Plaza relaunch likely had a negative ROI
Crowne Plaza America re-launch – Estimated impact (2011-2015)
RevPAR Number of rooms System revenue
2010 actual 61.1 57,073 1,272
Change 4.5% -14.5% -10.7%
2015 pro-forma 63.8 48,797 1,137

Net system revenue change -$136m

Fee % share 6.1%
Revenue impact for IHG -$8m
Return on EBNPP $100m investment -8.3%

Source: Exane BNP Paribas estimates

This is an example of IHG “doing it for the owners”, in our view, and Crowne Plaza
remains a problem child and a missed opportunity in the IHG portfolio. The Americas
RevPAR discount to Europe improved in the early years of the relaunch: 2011-2014
ADR improved +3.1pt in the Americas, ahead of Europe +2.0pt. But outperformance
has since stalled, and the discount remains significant: we estimate still c. -15% on a
comparable basis before the optical FX impact on Europe RevPAR.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 30

 Taking Crowne Plaza property owners’ membership of the IHG’s Owners Association
(IHGOA) as a proxy for brand engagement, we also note that Crowne Plaza owners
could be among the least committed to improving the brand, with only 59% of Crowne
Plaza owners actively participating in the IHGOA (compared to 74% across all brands
and 77% for Holiday Inn Express).

Figure 47: There is still some repair to be done at Crowne Plaza, not least in terms of owner engagement
Crowne Plaza - Americas vs Europe ADR IHG Owners’ Association membership by brand
$140 0%
80%

$120 70%
-5%
$100 60%

-10% 50%
$80

40%
$60
-15%
30%
$40
20%
-20%
$20
10%

$0 -25% 0%
2011 2012 2013 2014 2015 2016 2017 Holiday Inn Holiday Inn Express Crowne Plaza

Americas Europe LFL discount (rha) 2013 2014 2015 2016 2017
Source: company data, Exane BNP Paribas estimates, IHG Owners’ Association

As of 2018, IHG is still investing behind the brand, on a smaller scale, through the
Crowne Plaza Accelerate Program, effectively offering discounts on royalty fees to
Crowne Plaza owners who adhere to a comprehensive suite of brand standards. This is
guided to a c. -$5m revenue impact for IHG in FY18 (H118 -$2.5m), and on the H118
conference call management described the Accelerate program as “a long-term
journey”, with some early signs of success including rising customer satisfaction at
properties where new brand essentials including public areas have been deployed.

This is effectively a “soft relaunch”, in our view, with limited IHG investment and no
material risk of owner churn. If Accelerate proves to be successful in increasing owner
engagement and creating a precedent for RevPAR outperformance at “high adoption”
properties, we would see a second Crowne Plaza relaunch as likely to generate better
returns than the 2011-2015 clean-up.

Accor - ibis “megabrand” - Global rebranding 2012-2014

In 2011, Accor introduced a project to simplify its brand architecture in the midscale
and economy segments by re-branding existing ibis, Etap and All Seasons properties
under an over-arching ibis “megabrand” family, with two new sub-brands signalling
comparably higher-standard (ibis Styles) or lower-standard properties (ibis budget).

The rebranding was executed over 2012-2014. All in all the core ibis brand retained a
broadly similar perimeter with 124,000 rooms, but with the best positioned ibis
properties joining the higher end all seasons properties under the new ibis Styles sub-
brand (21,000 rooms). Conversely, the lower-rated ibis properties may have been
downgraded to the new ibis budget sub-brand, but with 47,000 rooms the new label
ended up comprising mostly of the Etap system (including some Etap-standard
properties that were effectively branded Formule 1 outside of France).

Identity-wise the three new sub-brands share a font and a new “pillow” logo, but are
differentiated through three new colours.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 31

 Figure 48: Accor reshuffled its Economy and Midscale portfolio in 2012
Accor – ibis “Megabrand” rebranding (number of rooms, 2011 vs 2013)

Source: company data, Exane BNP Paribas estimates

At the time of the launch, Accor management explicitly targeted a 1-2pt RevPAR index
benefit for the rebranded properties by 2014. Contrary to the Holiday Inn and Crowne
Plaza relaunches, Accor has managed to navigate this with no material impact on
signings, and ibis net room openings were actually 5pt stronger than group over the
period (it is worth keeping in mind that at the time Accor itself owned or leased close to
60% of all ibis hotels, bringing natural stickiness). The only “cost” to consider therefore
is the guided EUR150m investment in branding and marketing. Accor expected the
rebranding to generate a 20% ROCE, which we can easily reconcile as per below.

Figure 49: Accor’s 20% guided ROI requires modest RevPAR outperformance
Ibis “megabrand” re-branding – Estimated ROCE (2012-2014)
RevPAR Number of rooms System revenue
2011 actual EUR39.0 172,651 EUR2,458m
Change 1.5% 1.3% 2.8%
2014 pro-forma EUR39.6 174,939 EUR2,528m

Net system revenue change EUR70m

Revenue uplift for Accor EUR40m
Tax 25.3%
Return on EUR150m investment (guidance 20%) 20.0%

Source: Exane BNP Paribas estimates

Accor - hotelF1 - Relaunch 2017-2020e

The reader will have noticed that c. 10,000 Hotel Formule1 rooms were left out of the
ibis budget rebranding described above. In 2017, Accor announced a relaunch of these
under a new hotelF1 moniker, to be executed “over three years”. The refurbishments
involved in this relaunch were financed through the sale of an operating portfolio of 62
owned and leased hotels to SNI / CDC for EUR51m, the buyers committing to the
investments required under the brand plan. Post the AccorInvest stake sale we
estimate that Accor now manages 115 hotel F1 properties (including the SNI/CDC
properties), while the remaining 55 are franchised. It is too early to observe a potential
RevPAR uplift on the hotelF1 perimeter. Assuming returns of c. 20% in line with other
brand relaunches, the EUR51m investment would potentially yield c. EUR12-EUR15m
net revenue benefit to the hotel owners, a marginal benefit to Accor’s fee revenue.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 32

 Whitbread – Premier Inn - Capex program 2015-2017
With no franchisees to bring on board, asset-heavy Premier Inn has no need for high
profile, formally-announced “re-launches”. Instead, Whitbread has put in place a
systematic refurbishment cycle for each property, which involves light refurbishment
across years 3 and 9, the replacement of TV and soft furnishings after 6 years, and a
full refurbishment every 12 years.

However between 2015 and 2017 Premier Inn saw a spike in “maintenance and
product improvement” capex as they embarked on a more comprehensive programme
consisting of full proactive refurbishments. For FY15 and FY16 Whitbread disclose that
they fully refurbished c.16k rooms (c.25% of the estate), rolled out c.45k new beds, and
installed air conditioning to c.4.5k rooms. This came on top of rebranding of the
Beefeater restaurant brand and accelerated IT capex. Taking Whitbread’s disclosure
for Premier Inn’s maintenance and product improvement capex, we estimate underlying
maintenance capex to be c. 6% of revenue, implying a total c. £160m of extra
refurbishment capex through these years.

Using Whitbread’s disclosed returns for the Hotels and Restaurants business, we see
returns improving in 2015, before falling back in year 2. However, these years were
also marked by large investments in future room openings. If we focus on Whitbread’s
adjusted returns measure which adjusts for those, we see more clearly the
improvement by c.100bp across the three years of the 2015-2017 capex programme.
This underlying improvement in turn could have been driven by the better than
expected performance of the newly launched Hub brand.

Overall we believe that any future refurbishments should be taken to generate “at least
13% ROC at maturity”, in line with the wider Premier Inn targets. With GBP3.8bn of net
cash proceeds expected from the sale of Costa Coffee, and despite a commitment to
return a “significant portion” of those proceeds to shareholders, Whitbread could be in
a capacity to launch new extra refurbishments to support like-for-likes if needed, but we
would not expect this to be a priority compared to an accelerated rollout into Germany.

Figure 50: “Extra” refurbishment capex has helped adjusted returns at Premier Inn
Premier Inn - Maintenance capex (£m) Hotels and Restaurants returns (Whitbread definition*)
180 15.0%

160 14.5%

140
70 14.0%
50 40
120
13.5%
100
13.0%
80
12.5%
60 115
100 100 107
87 12.0%
40

20 11.5%

0 11.0%
FY14 FY15 FY16 FY17 FY18 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Underlying maintenance cycle Additional refurbishment Reported returns Adjusted returns
Source: Exane BNP Paribas estimates * Underlying operating profit / net assets at the balance sheet date + debt + taxa liabilities + pension deficit.
Adjusted returns are amended for the investment in future openings (>£200m in UK and Germany).

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 33

 Brand acquisitions

– In best cases, large chains acquiring smaller brands have been able to put their
commercial firepower to use to more than double the target’s footprint within 6 years.
– We caution that the expensive mid- and large-scale deals of 2014-2016 could be
failing the pipeline test so far: Accor’s Fairmont and IHG’s Kimpton have not
accelerated signings since acquisition, and rely entirely on their cost synergies to still
look like acceptable deals.
– Accor’s smaller deals outside of core hospitality bring no more than an optical foot
in the door. The write-downs at OneFineStay and John Paul suggest that it may be
difficult for hotels to deliver synergies from the wider “travel” ecosystem.

Strong precedents of pipeline growth at acquired brands

Identifying a market niche, acquiring a proven concept, and putting all your sales and
marketing firepower behind it: major chains have been able to radically transform small
hotel brands upon acquisition. And as much as anyone likes synergies, we believe a
major part of the value creation equation lies in the boost to room openings that can be
delivered under a new commercial platform. Across three successful brand acquisition
precedents from 1995-2011, Candlewood Suites, AC Hotels, and Ritz-Carlton, we
find that room openings accelerate in year 3-4 following an initial review and clean-up
of the existing portfolio, with a best case of doubling the size of the system by year 6.

Figure 51: Acquired brands can double in size by year 6: Fairmont / Kimpton no more than broadly on track
Historical brand acquisitions – Number of rooms* Recently acquired brands – Number of rooms*

220 220
Candlewood - IHG 2003 Mama Shelter - Accor 2014
200 AC by Marriott - Marriott 2011 200 Fairmont - Accor 2016
Ritz-Carlton - Marriott 1995 Kimpton - IHG 2014
180 180

160 160

140 140

120 120

100 100

80 80

Source: company data, press releases, Exane BNP Paribas estimates. *indexed to number of rooms when acquired = 100

Candlewood Suites, an extended-stay brand, was acquired by IHG in 2003 with

12,500 rooms open and a further 2,300 in the pipeline. Within 6 years of the
acquisition, the number of rooms more than doubled, and pipeline as a percentage of
existing rooms rose from 19% at acquisition to 59% after two years, well above the IHG
average at the time of 20%. This was despite an initial negative signings momentum.
Today the Candlewood network stands at 35,000 rooms, having continued to grow
strongly from year 6.
AC Hotels, an upscale European brand serving business and leisure travellers, has
seen a comparable growth trajectory since forming a joint venture co-brand with
Marriott, AC by Marriott, in 2011. Room openings accelerated markedly 3 years
following the deal and the brand also doubled its size by year 6 (from 7,000 rooms in
2011 to 14,700 rooms as of H117).

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 34

 Marriott acquired 49% of the Ritz-Carlton in 1995 and purchased an additional 50%
stake in 1998. This was Marriott’s first entry into the Classic Luxury segment and Ritz-
Carlton continues to be described as delivering some of the highest guest satisfaction
scores in the luxury market. However in the years following acquisition growth was
more muted than in our other acquisition precedents: the number of rooms eventually
increased almost twofold from 10.3k in 1995 to 19.3k in 2005, but it took Marriott 10
years.

Recent (larger) acquisitions no more than broadly on track

Accor - Mama Shelter is probably the most successful deal in recent years if judged
by the acceleration in room openings. Accor acquired a 36.6% stake in this midscale
brand and ‘lifestyle’ concept in November 2014, with an initial objective to open 20 new
properties over 5 years. Within the 3.5 years since acquisition, the brand has grown
from 600 to 1,000 rooms. This has limited impact on Accor’s room growth, though:
Accor directly manages only 178 Mama Shelter rooms in South America, while the
other 6 properties in Europe and North America have remained outside of the
agreement.

But is the commercial push behind newly-acquired brands replicable in large scale
deals? The optically expensive acquisition multiples paid by IHG for Kimpton (2014,
21.5x EBITDA) and by Accor for FRHI (2016, 20.3x) suggest that both synergies and a
strong rollout are required to make the deal work. It is still early days, but we are
unimpressed by the signings momentum at those large deals, and see better value in
small to medium-sized acquisitions with a strong business development potential going
forward.

Figure 52: Justifying expensive deals requires synergies and pipeline growth
Recent acquisitions - Multiples and estimated returns
Consideration EBITDA EV / EBITDA EV / EBITDA ROCE
Pre-synergies Post-synergies (EBNPP)
IHG - Kimpton - 2014 $430m $20m 21.5x 10.9x 6.9%
Accor - Fairmont - 2015 $2,840m $140m* 20.3x 13.8x** 6.5%
Accor - Mantra - 2017 EUR900m EUR73m 12.4x 9.0x 8.3%
Accor – Movenpick - 2018 EUR482m EUR32 14.9x 9.0x 8.3%
Accor – Atton Hoteles*** - 2018 EUR67m n/a n/a 10.0x 7.5%

Source: company data, Exane BNP Paribas estimates. *incl. $20m from JVs **post synergies and development
***operating company only (real estate arm also acquired at 9.0x EV/EBITDA post synergies for EUR22m)

IHG - Kimpton Hotels & Restaurants. Kimpton was acquired by IHG at the end of
2014 and sits within the Luxury segment. Management cited ‘compelling financial
rationale’ behind the transaction as well as significant opportunities to launch the brand
globally, overall expecting to double EBITDA from $20m in FY14 to $39m by FY17, and
to capitalise on high growth in demand for boutique hotels. The acquisition did not
come cheap at 21.5x EV / EBITDA pre-synergies, but this was expected to come closer
to 10.9x post synergies. However, room openings were hampered in the first year by
owner churn on the back of labour agreements issues, and resulted in a loss of a
number of key properties from the portfolio. Three years later the Kimpton pipeline as a
percentage of rooms has fallen from 27% to 24%. System size growth is now showing
signs of re-acceleration with 14% growth in the last year, and IHG is now moving the
Kimpton brand to global expansion, with H118 signings in Frankfurt, Shanghai, and
Mexico City). But Kimpton is unlikely to be a major growth differentiator, with the rest of
the IHG portfolio standing at 32% of existing rooms.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 35

 Accor - FRHI / Fairmont. In 2015 Accor announced the acquisition of the FRHI hotel
portfolio comprising the brands Fairmont, Raffles and Swissotel, with c.43,000 rooms
and a further 13,000 in the pipeline at the time. This was Accor’s first significant foray
into the luxury segment outside of its legacy brand Sofitel. At acquisition, management
stated that the $2,840m transaction would be accretive to EPS from year 2, helped by
1. a large share component (only $840m cash portion), 2. a bucket of EUR65m of
identified synergies across support costs, marketing, and revenue, and 3. the
opportunity to use Accor’s US deferred tax assets from the Motel 6 period. Together
this is expected to take down the acquisition multiple from 20.3x pre-synergies to 13.8x
post synergies and development. Beyond this 2-year rationale, the acquisition has not
delivered a material acceleration in signings. As of December 2017, the FRHI brands
still had only 13,000 rooms in the pipeline, representing 28% of their current system,
still slightly accretive to Accor’s 26%, but actually down from 30% at acquisition. Recent
Accor management comments suggest that new signings have been solid, so that we
would attribute the unchanged pipeline to a one-off clean-up and will be watching
FRHI’s pipeline progression from here.

Figure 53: FRHI and Fairmont pipelines not accelerating since acquisition
Brand acquisitions – Pipeline as a percentage of rooms post-acquisition, compared to group

59%

30% 32%
28% 27%
26%
24%
20%
19%

Candlw. Candlw. IHG FRHI FRHI Accor Kimpton Kimpton IHG

acquired +2 years base acquired +2 years current acquired + 3 years current
Dec 03 Jun 06 Jun 06 Dec 15 Dec 17 Jun 18 Mar 15 Mar 18 Mar 18

Source: company data, press releases, Exane BNP Paribas estimates

Other acquisitions
An acceleration in signings in year 3-4, with the aim of doubling the size of the system
by year 6: if our framework is to be trusted, it is way too early to assess the following
2017-2018 deals. Below are a few qualitative comments on the direction of signings at
more recently acquired brands.

IHG - Regent Hotels & Resorts. In July 2018, IHG acquired a 51% stake in this Luxury
brand for $39m. Regent has 6 hotels (2,000 rooms) and 3 more in the pipeline (900
rooms). There are currently “several” new openings planned in “key gateway cities and
resort locations”. Management sees a potential to grow Regent to over 40 hotels
(10,000 rooms) “over the long-term” (i.e. multiplying the current footprint by 5x). On the
H118 conference call in August 2018, CEO Keith Barr commented that interest from
owners has been strong, with a mix of new owners looking for a new price point within
luxury that was not covered by IHG’s portfolio until now, as well as current
InterContinental owners looking to expand their portfolio towards the top end with an
alternative Luxury offer not competing directly with their existing InterContinental
property.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 36

 Accor – Atton Hoteles. Accor acquired Chilean Group Atton Hoteles in May 2018 for a
total cash consideration of EUR 89m with the aim to strengthen their position in Latin
America. Atton currently operates 11 hotels (2,259 rooms) across Chile, Peru,
Colombia and Florida within the mid- and upscale segments. Most of the portfolio will in
time be rebranded to Accor brands Pullman, Novotel, MGallery & Mercure. Note that
the EUR 89m consideration includes EUR 67m for 100% of the operating company,
and EUR 22m for 20% of the property arm.

Accor - Mövenpick Hotels & Resorts. Accor announced in April 2018 its acquisition
of this Swiss brand of hotels for EUR 482m, implying a 14.9x 2019e EBITDA multiple
pre-synergies and “less than 10x” post synergies. Mövenpick has a portfolio of more
than 20k rooms and operates in over 27 countries with a particularly strong presence in
Europe and the Middle East. With plans to open a further 42 hotels by 2021, current
pipeline represents c.55% of total rooms and therefore the potential for accelerated
growth in the first few years looks promising.

Accor – Mantra Group. In October 2017 Accor announced the acquisition of one of
Australia’s largest hotel and resort operators for EUR 900m implying an EV/EBITDA
multiple of 12.4x pre-synergies (and “high single-digit” post-synergies according to
Accor estimates). At acquisition, Mantra Group operated 127 properties (20k+ rooms)
across 3 brands: Peppers (Upscale; 28 properties), Mantra (Midscale; 75 properties)
and BreakFree (Economy; 24 properties). The portfolio ranges from luxury
accommodation to serviced apartments across Australia, New Zealand, Indonesia and
Hawaii, and the Group also manages restaurants and bars, pool and entertainment
facilities and conference centres. Since acquisition, the Mantra brand has opened two
further properties.

Figure 54: Accor spent most of its recent M&A budget on core hospitality deals
Accor – Core Hospitality acquisitions since 2016 (EURm)
Date Stake Segment Countries Size Consideration
25hours Nov-16 30% Boutique 3 c.1k rooms -
Banyan Tree Dec-16 5% Luxury 28 8k rooms €16m
Rixos Hotels Mar-17 JV 50% Upscale / Luxury 7 7,129 rooms -
BHG portfolio Mar-17 100% Economy / Midscale / Upscale 1 4.4k rooms €60m
Mantra Oct-17 100% Economy / Midscale / Upscale 4 20k rooms €900m
Movenpick Apr-18 100% Upscale 27 20k rooms €482m
Mantis Apr-18 50% Boutique 33 86 hotels -
Atton Hoteles May-18 100%* Upscale 4 2.3k rooms €89m
sbe Entertainment Jun-18 50% Boutique / Lifestyle 5 23 hotels €274m
21c Museum Hotels Jul-18 85% Concept / Boutique 1 8 properties €44m
Source: Company press releases. Exane BNP Paribas estimates. * 100% of OpCo and 20% of PropCo

Taking all of the above acquisitions together, Accor has been focusing c. 90% of its
M&A spend on its Hospitality core business, but has also diversified into adjacent
markets with smaller deals across catering, nightlife, distribution, and home rentals.
The prices paid were only disclosed for Gekko (EUR100m), John Paul (USD150m
valuation) and onefinestay (EUR148m plus a further EUR50m to help the company
scale internationally).

At their H118 results the Group recorded an impairment of EUR 246m relating to the
New Businesses division. While performance for Gekko, VeryChic and the ‘Digital
Factory’ (Availpro and Fastbooking) was described as “sound”, onefinestay and John
Paul were flagged as weaker, with “top-line growth notably [relying] on synergies and
scaling plans which have not been delivered as planned. This, with incremental
development costs, led to a negative scissor effect weighing on current performance.”

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 37

 Despite Accor management reiterating their confidence that serviced private homes
and concierge services offered “strong potential”, we see this as an indication that it
may be harder than expected for hotel companies to extract synergies from the wider
“travel” ecosystem, and we believe that these write-downs will further increase investor
scepticism around any further acquisition announcements outside of core hospitality.

Figure 55: Non-core acquisitions: home rental, tech… and write-downs

Accor – Other acquisitions since 2016
Date Stake Business Countries Size
Oasis Feb-16 30% Private Rentals Marketplace 11 1,500 properties
Squarebreak Feb-16 49% Private Rentals 7 -
onefinestay Apr-16 100% Luxury Home Rentals >40 2,600 properties
John Paul Jul-16 80% Concierge Service >50 50k partners
Travel Keys Feb-17 100% Luxury Villa Rentals c.15-20 5,000+ Villas
Potel & Chabot Mar-17 40% Events Catering c.7 -
VeryChic Apr-17 100% Private Sales Platform 40 3,000+ Hotel Partners
Noctis May-17 31% Events, Catering & Entertainment 3 3,000+ Events p.a
Availpro Apr-17 100% Digital Services Provider - 6,500+ clients
Nextdoor Jul-17 JV 50% Co-working Space 1 -
Gekko Oct-17 100% Hotel Reservations Platform 4 500k+ Hotels Worldwide
Orient Express brand Oct-17 50% Luxury Train Travel - -
ResDiary Apr-18 100% Restaurant Reservations 59 8,700+ Restaurants
Adoria Jun-18 100% Catering Solutions c.5 2,700 Organisations

Source: Company press releases, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 38

 Online Travel Agents and disintermediation

– Online Travel Agents now generate c. 15-20% of booking volumes for large hotel
chains (IHG 17%, Accor EBNPP 20%), and have grown faster than any owned
channel, including the hotels’ own “brand.com” websites.
– OTA bookings come with 10-15% commissions. As predominantly Franchisors,
listed companies are largely protected from this cost impact, but their failure to defend
their “system” share of bookings weakens their proposition to property owners.
– The theoretical impact of OTAs taking another 5pt market share in the next 5 years
would be -1.8% for Accor and -0.7% for IHG. Mobile penetration, a shift in OTAs’ focus
away from discounts and into convenience, and operating leverage fuelling the OTAs’
marketing spend are three reasons this risk could materialise.

Booking channels: a marked shift to Online since 2005

Hotel customers can use 5 different channels to make their bookings. Three of those
are considered “direct channels”, in that the customer’s first point of contact is either
the property or the brand owner.

Figure 56: IHG and Accor have a similar channel mix, Whitbread is Online driven
Bookings* by channel
100%
6%
17% Online Travel Agents (OTAs)
20%

13% 9% Other third-parties

22% 20%
Online - own Websites / Apps
88%
10% 18% Call centers etc

Hotels direct
38%
33%

6%
0%
IHG Accor Premier Inn
2017 2017 EBNPP 2017

Source: company data, Exane BNP Paribas categories. *IHG and Accor as a percentage of system revenue,
Whitbread as a percentage of bookings. Accor 2016 based on 2013 full disclosure and H116 partial disclosure

– Hotels direct: a third of booking volumes still originate from the customer walking
in unannounced, or phoning the property. Direct bookings at the hotel are perceived by
owners as being “natural” and originating from customer loyalty to their individual
property, from previous good experience, or from superior location… in all cases this is
the channel where the benefits of operating a branded hotel are the least defendable.
Owners may be biased to forget that some degree of marketing from the brand may
have helped raise their property’s profile, that some of these direct volumes are
“captive” to the brand’s loyalty schemes, and that software provided by the brand
owner will be used in effectively making the booking. The Hotels Direct channel has
been losing share as more customers move to online channels, effectively reinforcing
the branded rationale.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 39

 – Call centres and Online Direct (“brand.com”) are the two other direct channels,
this time with clearer benefits from being part of a chain. The brand owner operates the
call centres and “brand.com” websites and delivers the bookings to its franchisees or
managees. Online has been the fastest-growing direct channel, while call centres have
declined but surprisingly outperformed other legacy channels such as hotels direct.
Indirect channels in turn represent any booking made through third parties.
– Online Travel Agents (OTAs) are the fastest-growing channel. The OTAs capture
customer demand by offering a convenient and consistent cross-platform experience
(desktop, mobile websites, applications) and driving their visibility heavily through a
wide range of online promotional tools (Search Engine Optimization, Search Engine
Marketing, affiliate programs…). We estimate that OTAs represent between 15% and
20% of bookings for large chains (IHG 17%, Accor EBNPP 18%). For brand owners,
the increase in the OTA share of bookings can become a topic of disagreement with
franchisees: property owners may feel that a third party is generating volumes for which
the brand owner has had limited value add, and still they will be required to pay both a
brand royalty fee and an OTA commission.
– Other third parties include traditional brick-and-mortar travel agents, providers of
package travel, or corporate travel brokers. These have collectively maintained their
market share between 10% and 15% for large chains. We would attribute this
stickiness partly to the slow-moving nature of corporate bookings.

Figure 57: OTAs have been taking share of IHG’s bookings. Their own Online channel has underperformed
IHG – Bookings* by channel since 2005 IHG - System revenue growth by channel (2013-2017 CAGR)
100% 20.0%
Online Travel agents (OTAs) 19.3%

Other third-parties
80%
Online - own Websites / Apps

60% Call centers etc

7.0% 6.6%
Hotels direct

40% 2.0%

-0.4%
20% -1.9%

Booking IHG IHG IHG IHG IHG IHG

.com Online Digital GDS Call Hotels Rewards
0% gross Travel Web + centres / Direct Club
bookings Agents Mobile CRO Direct

Source: company data, Exane BNP Paribas estimates. * as a percentage of gross system revenue

While the trends described above have been directionally consistent since 2005, we
note a marked acceleration in the channel shift since 2013. We make three key
observations on this inflection point:
– Not defending online share. Over 2013-2017, IHG has seen its OTA bookings
grow by 19.3%. This is fully in line with the 20.0% bookings CAGR reported by leading
OTA booking.com, suggesting that hotel chains are not managing to defend any share
within the wider OTA market growth.
– Brand.com websites underperforming. IHG’s own digital bookings have grown
by only 7.0% CAGR since 2013. This means that IHG.com is markedly
underperforming OTA websites in terms of traffic and conversion. This is despite some
natural booking transfers from legacy channels: for example if we assume that the
optical decline in IHG Rewards Club Direct is a consequence of loyalty program
members moving online, then IHG’s underlying direct online bookings have been
growing by only c. 5.6% CAGR.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 40

 – 2013 is the last year when Accor reported its channel mix in detail.
Management has since mentioned commercial sensitiveness as the reason it would not
disclose the detailed channel mix. In the absence of any commentary to the opposite,
we have assumed that Online as a whole has gained another 9pts of share since 2013,
with Direct at +3pt and OTAs at +6pt.
In the next section we turn to the listed Online Travel Agents to identify the reasons for
the 2013-2014 inflection point and assess the likely direction of OTA bookings.

Online Travel Agents are the main beneficiaries of the Online shift
Approximately 44% of the value of the global travel market was transacted online in
2017, according to PhocusWright data quoted by Expedia. This includes
accommodation, air and rail travel, and other ancillary spend. There are three main
listed Online Travel Agent companies that investors can turn to in order to better
understand online booking trends. Collectively these three operators represent c. 43%
of the global Online travel market:
– Booking Holdings (BKNG US, $90bn market cap), based in Connecticut, operates
the customer-facing websites booking.com, priceline.com (both generalists) as well as
Agoda (Asia focused), and meta-search website Kayak. The company has sought to
address adjacent markets through the acquisitions of Rentalcars.com (car rental), and
OpenTable (restaurant bookings). In FY17 Booking generated a gross transaction
value of c. $81bn and revenue of $12.7bn on the sale of over 670m hotel room nights.
– Expedia (EXPE US, $19bn market cap), based in Washington, operates the
customer-facing websites Expedia.com, Hotels.com, meta-search website trivago, as
well as BtoB travel agent Egencia. More recently Expedia has also diversified into
home rentals by acquiring HomeAway. In FY17 Expedia generated a gross transaction
value of $88bn and revenue of $10.1bn on the sale of over 310m room nights.
– Ctrip (CTRP US, $20bn market cap), based in Shanghai, operates the customer-
facing websites ctrip.com, as well as meta-search website skyscanner. As a group Ctrip
owns stakes in MakeMyTrip (OTA, India), and BTG Hotels (Hotel chain, China). In
FY17 Ctrip generated revenue of $4.1bn. We estimate gross booking value was c.
$135bn (last reported c. $56bn in 2015), with lower blended commissions than peers.

Figure 58: Global travel spend is c. 44% Online, with local leaders in the US and China
Global Travel market – Online vs Offline Global Travel Market – Key players market shares*
27%

$256bn
19%
$194bn
$226bn

Online 12%
11%
Offline

7%
6%
5%
$300bn $292bn
$255bn

$32bn
$55bn Ctrip Expedia Booking N. Am. EMEA APAC LatAm

North America EMEA APAC LatAm Global market shares Expedia market share by region

Source: Expedia February 2018 Investor Presentation based on PhocusWright data, Booking data, Ctrip website, Exane BNP Paribas estimates. *as
a percentage of global gross booking volumes.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 41

 Commission risk: -1% to -3% EBIT risk across our coverage
The OTA business model relies on commissions charged on the gross value of every
booking, which we estimates can be as low as 7.5% for the lower value-add and higher
volume BtoB businesses (eg. Expedia’s Egencia business), and as high as 19.7% for
the “bedbanks” packages focused on late market, “distressed” inventory (eg. Cinven’s
Hotelbeds).

On a group basis most BtoC OTAs dealing with chain hotels are likely to reach an
equilibrium at c. 10% - 15% commission rate, in our view. This can be significantly
lower on a country basis for large “must have” chains (eg. Accor portfolio in France,
Marriott portfolio in the US), but also significantly higher in regions where an individual
chain is under-represented (effectively being treated like an independent by OTAs).

Figure 59: Why hotels are not channel-agnostic: OTAs charge c. 10% - 15% commissions
US OTAs – “Revenue margins” (proxy for commissions) OTAs and Bedbanks - Commissions range

16%
Egencia (BtoB) 2017 avg. 7.5%
14%

Accor France on OTAs EBNPP c. 10%

12%

10% Expedia 2017 avg. 10.8%

8%
Marriott on Expedia 2015 12.0%
6%
lastminute 2017 avg. 12.3%
4%

2% Booking 2017 avg. 13.9%

0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 Hotelbeds (Bedbank) 2015 avg. 19.7%

Booking Agency Expedia OTA Expedia BtoB

Source: company data 2011-2012, press reports, Exane BNP Paribas estimates

This means that an increase of +5pt in OTA share, in line with what we noticed
between 2013 and 2017, if it were to reoccur, should have a material margin impact on
hotel operators (we estimate -5% EBIT impact for owned or leased hotels as the
additional OTA commission eats directly into their profits). Listed companies are more
protected as predominantly managers (we estimate -2% EBIT impact, with only the
incentive fee portion being impacted to an extent) or franchisors (no direct EBIT impact
all else equal given commission costs have no impact on headline room revenue, but
making it harder to justify franchise royalty fees).

Figure 60: Franchisors are in theory immune from the OTA commission risk
Sensitivity to +5pt higher OTA share in bookings, by hotel operating model
Owned / Leased Managed Franchised
Hotel revenue 100.0 100.0 100.0
Consolidated revenue 100.0 6.0 6.0
Base EBIT 15.00 2.73 4.26
EBIT at +5pt OTA share / 15% commissions 14.25 2.66 4.26
EBIT impact -5% -2% 0%
Margin impact -75bp -62bp n.c.

Source: Exane BNP Paribas estimates

Applying these margin impacts to each company’s P&L in proportion of their operating
models, we see -0.7% EBIT risk for IHG, -1.8% for Accor, and -3.2% for Whitbread in
a scenario where OTAs take +5pt share in their respective bookings mix.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 42

 Figure 61: Single-digit EBIT risk if OTAs take another 5pt share, flat commissions
Sensitivity to +5pt higher OTA share in bookings for European listed companies
IHG Accor Whitbread
FY18e EBIT 816 659 481
margin 43.6% 16.8% 23.1%

EBIT at +5pt OTA share / 15% commissions 811 549 465

margin 43.3% 16.5% 22.4%
change -0.7% -1.8% -3.2%

Source: Exane BNP Paribas estimates

We make two observations:

– So far the increase in OTA bookings has been in large part compensated by the
downwards-trending commissions paid to OTAs.
– The exercise is purely theoretical for Whitbread, with Premier Inn having actually
managed to reduce their share of OTA bookings from 9% in 2015 to 6% in 2017.

Will the risk materialise?

As discussed above, IHG has seen a marked acceleration in the Online Travel Agents’
share of bookings since 2013, at +1.8pt p.a. (after c. +1.0pt p.a. since 2005). Accor
also saw a marked increase of +4pt in 2014, but poor disclosure since does not allow a
like-for-like comparison in the OTA trend.

We see four main reasons why OTA bookings should continue to take share in the
distribution mix of major hotel chains in the next 5 years: 1. The continued shift to
mobile, 2. OTAs now focusing on convenience rather than price discounts, and 3.
delivery on operating leverage implying that OTAs can become more rational and still
boost their marketing budget by c. 40%.

1. Continued shift to mobile

The 2013-2014 inflection point in OTA share has coincided with a sharp increase in
mobile adoption: the gap between IHG’s own Online bookings and OTA bookings had
remained constant at c. 10pt between 2005 and 2013, but has narrowed to now only
5pts at the same time as mobile adoption increase from below 5% to now over 40%.

Figure 62: OTA share gains have accelerated with the rise in mobile bookings
IHG – Bookings share from Own Digital channels vs Online Travel Agents and mobile penetration
25% 50%

Mobile share of
Online (rhs)
20% Δ5pt 40%

Online - own
Websites / Apps
15% Δ10pt 30%

Online Travel
Agents (OTAs)
10% 20%

5% 10%

0% 0%

Source: Exane BNP Paribas estimates. * as a percentage of gross system revenue

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 43

 We estimate that the weight of mobile within the overall online channel has increased
by 12pt-25pt since 2013 across major hotel and OTA players. This is likely to continue:
for Lastminute.com, mobile represents 35% of bookings but already 50% of traffic.

Figure 63: We believe OTAs have structurally higher market share on Mobile vs Desktop
IHG – OTAs share of Online vs mobile penetration* IHG - Implied Bookings mix across digital channels
70%
100%
65%
OTA s share of IHG's Online bookings

60% 29%

55%
65%
50%
OTAs
45%
2015 2017
40% IHG own
71% Online
35%
2013
30%
35%
2010
25%

20% 0%
0% 20% 40% 60% 80% 100% Desktop Mobile
IHG mobile penetration
Source: Exane BNP Paribas estimates based on company data. * mobile system revenue as a percentage of IHG’s own Online system revenue

IHG has actually outperformed, and their 43% mobile share is higher than any other
OTA or hotel disclosure we could come across. However, we believe they may be
stepping into a mobile world where OTAs have structurally higher market shares
compared to desktop internet use. One of the possible reasons is the “mobile real
estate” issue: the number of mobile apps installed on smartphones is not as unlimited
as websites bookmarked on desktop browsers. Three months after download, app
retention is only 20%-30% for the main categories.

Figure 64: IHG has outperformed so far, but brand-specific apps could be less sticky vs marketplace apps
Mobile share of own Online Bookings* Mobile Apps - User retention** by industry
45% 45% Month +1
Month +2
40% 40%
Month +3
35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%
2013 2014 2015 2016 2017 Media & eCommerce / Travel & Business &
IHG Expedia Entertainment Retail Lifestyle Technology
Accor (EBNPP) Lastminute.com
Source: company data, Localytics, Exane BNP Paribas estimates. * Expedia as a percentage of group gross bookings, IHG as a percentage of gross
system revenue, Accor not specified “mobile in direct web channel” estimated based on Q414 and H116 disclosure.** Retention defined as
percentage of users returning to a downloaded app at least once in each 30-day period.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 44

 We believe that smartphone usage encourages marketplaces, a phenomenon we have
noticed in our coverage of Food Delivery and can see parallels to in apparel retail and
in the wider e-commerce ecosystem. If a user is only going to retain one travel-related
app on their home screen, is it likely to be a generalist / marketplace app, or a single-
brand “hotel.com” app? In other words, “do I delete Expedia or AccorHotels” boils down
to the same question as “do I delete Just Eat or Domino’s Pizza”, and we would expect
OTAs to continue to outgrow brand.com channels as the shift to mobile continues.

2. OTAs now focused on convenience rather than price discounts

Another feature of the 2013-2014 period is that OTA revenue definitively diversified
away from the “discount” business and into the agency and audience businesses.

The early days of online travel were undoubtedly marked by consumer perception that
this “new” channel was a smart way to travel, giving unprecedented access to prices
across providers and “under the radar” deals not offered by legacy channels.
Booking.com used to generate as much as 58% of their revenue through a merchant
model built around the exclusive “Name Your Own Price” function of their priceline.com
website, allowing customers to effectively bid for committed capacity already contracted
by the company. While “Name Your Own Price” still exists, users today have to scroll
down 5 screens of milder and more generic agent “deals” before finding any mention of
it on priceline.com. We estimate that the discount model reached below 30% of
revenue for Booking in 2013.

At the same time, OTAs were also discovering the power of their BtoC brand
recognition and started generating revenue from advertising and media sales (ie
charging hotels for display banners or for sponsored positions in search results).
Booking’s advertising revenue first surpassed 5% of group revenue in 2014. Before
that, Expedia recognised the standalone potential of its reviews / media branch
TripAdvisor through a spinoff completed in 2011.

Figure 65: The “Price Promise” stopped really mattering for OTAs around 2014
Booking – Estimated* Revenue breakdown by category (EBNPP)

100%
5% 7% 7% 7%

Advertising / media
37%
45%
54%
60%
65%
Agency
4% 69%
71% 74% 77%
6%

7%
Merchant - Package focused
9%
58% 10%
49%
39% 10%
9%
31% 11%
23% 12% Merchant - Discount focused
16% 13%
8% 5%
0%
2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Exane BNP Paribas estimates based on Booking reported Agency / Merchant revenue. * assuming
“revenue margin” on Package-focused Merchant bookings in line with revenue margin on Agency bookings

From a more regulatory angle, in certain countries OTAs were also forced to
progressively de-emphasize their “discount” positioning by a series of rulings on Price
Parity. Contracts between OTAs and hotel chains could historically include two types of
pricing agreements:

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 45

 – “Wide price parity clauses” specify that the OTA must have access to the hotel’s
lowest room rate and best room availability compared to any other direct or indirect
channel.
– “Narrow price parity clauses” specify that the OTA must have access to the
lowest room rate and best room availability available on the hotel’s public and direct
channels, but do not prevent the hotel from offering a better rate to other OTAs, or
privately to members of its loyalty program.

Major European countries, starting with France in 2015 (the Macron Law) have moved
to make any price parity agreement illegal, while in Australia / New Zealand and in the
remaining European Union countries Booking.com and Expedia have taken the
voluntary step of not using anything more restrictive than “narrow” parity clauses.

Figure 66: Rate Parity rulings have given some power back to hotels, but maybe too late
Rate Parity - Regulatory developments since 2013
Explicit regulation banning rate parity Specific / voluntary decisions on / by OTAs No regulation
France Germany United States
Macron Law HRS / Boking.com prohibited from using parity -
July 2015 December 2013 / December 2015 -

Austria European Union Latin America

Competition Law updated Booking.com and Expedia move to narrow parity -
November 2016 June 2015 / July 2015 -

European Union Australia

Joint report by European Competition Network ECN Booking.com and Expedia move to narrow parity
April 2017 September 2016

Italy New Zealand

New Competition and Markets Law Booking.com and Expedia move to narrow parity
August 2017 September 2016

Belgium
Agreement between Hotels and OTAs deemed invalid
November 2017

Switzerland tbc
September 2017
Parliament voted to ban rate parity, to be enacted
by Government within 2 years

Source: European Commission, Trivago Business Blog, Exane BNP Paribas estimates

These rulings have initially been seen as a positive for hotel operators as they allowed
them pricing freedom, and provided a strong argument to push customers to their
controlled online channel and into their loyalty schemes where “private audience”
discounts can now be offered.

However we fail to notice any improvement in the booking share momentum of Owned
Online channels compared to OTAs and third party channels since these rulings. If
anything we believe that they may have had the perverse effect of accelerating the
OTA’s repositioning away from discounters and into a pure functionality and
convenience model, driven by dominating marketing spend and by owning the
customer.

3. OTAs can become more rational and still boost marketing spend by 40%
The final reason why we expect OTAs to continue to take share is their favourable
volume economics. Since 2013, Booking and Expedia’s EBITDA growth has been
“only” 16%-18% p.a, compared to 25%-27% volume growth (room nights sold). This
has been driven by material investments in advertising and marketing, which have
more than consumed all the operating leverage generated on overheads.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 46

Figure 67: The OTA’s strong operating leverage has helped fuel a steady increase in their marketing spend
Booking – Cost items (% of revenue) Expedia – Cost items* (% of revenue)
55% 55%

50% 50%

45% 45%

40% 40%

35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 2009 2010 2011 2012 2013 2014 2015 2016 2017
Labour (+5pt) Marketing (+20pt) Labour (-2pt) Marketing (+14pt)
Overheads (-42pt) Overheads (-6pt)

Source: company data, Exane BNP Paribas estimates. * Labour costs include estimated share of marketing and technology personnel costs

With consensus forecasts now modelling milder OTA revenue growth of 10%-15% p.a.,
and flat or even slightly improving EBITDA margins, some investors may be tempted to
conclude that the big “marketing push” is now over and that hotel operators will have an
easier task defending their direct share of bookings against OTAs.

Figure 68: Consensus now seems to expect OTAs to be more rational on margins…
US OTAs – Consensus revenue growth US OTAs – Consensus EBITDA margins

45% 45%

40% 40%

35% 35%

30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%

Booking Expedia Booking Expedia

Source: company data 2011-2017, Bloomberg consensus 2018e-2020e

But we caution that Booking and Expedia can both improve margins and increase their
marketing spend at the same time going forward. Based on historical operating
leverage, we believe that consensus margin forecasts allow Booking and Expedia to
increase their absolute marketing budget by c. $2bn each. This would equate to a
+41% potential increase, despite being -180bp lower as a percentage of revenue for
Booking, and to a +40% increase, or +90bp higher as a percentage of revenue for
Expedia.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 47

Figure 69: … but we caution that flat margins are not inconsistent with continued marketing investments
Major OTAs – Growth in key KPIs (2013-2017 CAGR) Annual marketing budgets compared
27.0% Booking
25.6% Expedia

+$2,116m
2020e potential

+$2,075m
21.9%
20.0%
18.0% Current
17.8%
16.9%
16.1%

$5,298m
$5,095m

$1,771m

$1,242m
Booking Expedia Accor IHG
Room Gross Revenue EBITDA Marketing Marketing Services to System
nights bookings costs costs owners Fund

Source: company data, Exane BNP Paribas estimates.

In contrast, excluding any unannounced margin reinvestments, we expect Accor and

IHG’s system funds to grow by only c. 6-8% p.a., driven by like-for-like RevPAR growth
and the pace of new room openings.

4. Hotels have stepped up on loyalty

Loyalty programmes have existed for a number of years with the primary purpose of
increasing spend from regular customers. More recently however we have seen an
increased focus by hotel chains on improving their loyalty programme to increase
expenditure but also to accelerate customer acquisition and improve retention, crucially
in the digital realm. With OTAs having lost their “price edge”, hotels are using their
loyalty programme to go further and offer loyalty members exclusive discounts. As a
result, we have seen an acceleration across the past few years in loyalty member
growth across the listed hotel chains. While the proportion of group revenue coming
from Rewards members directly engaging with hotel has continued to fall, this has been
more than compensated by growth from digital Rewards members with the channel
growing even quicker than the OTAs.

Figure 70: Improved loyalty programmes are driving growth in the direct digital channel
Loyalty Program members (m) Change in IHG revenue contribution 2014-17
140 7%
5.7%
124 6%
120 5.1%
5%
100 4% 3.5%

3%
80 71
71 2%
60
1%
36
40 41 0%

(1%)
20
10 (2%)
-2.2%
0 (3%)
2012 2013 2014 2015 2016 2017 IHG Rewards o/w direct o/w digital OTAs
IHG Accor Hilton

Source: Exane BNP Paribas estimates, IHG, Accor, Hilton

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 48

 The case for de-flagging remains weak
We mentioned above that on paper, a franchisor / brand owner faces no direct earnings
risk from an increase in OTA share, as the additional commissions do not impact the
“room revenue” used as a basis for the royalty fee. The most dangerous aspect of a
continued increase in OTA market share, therefore, is that it threatens the perception of
brand strength by reducing the share of volumes generated by brand platforms (direct
hotel bookings, call centres, and “brand.com” owned online bookings).

Branded hotel owners may be tempted to go back to being independents, or “de-flag”

their hotel, thus saving on the royalty fee. We estimate that losing the brand would
create a 55% revenue shortfall overnight for most hotels, and that a targeted marketing
reinvestment, in an amount equivalent to the savings on royalty fees, could rebuild up
to 95% of the original revenue.

Figure 71: Going independent leaves a hole in the revenue line…

Deflagging scenario – Base case – Revenue impact
100
5
20
Shortfall

10 OTA
55 45

20 Other 3rd parties

5 Brand.com
10

20 Other brand
channels
5 45
40 Direct

20

0
Current Deflagging Marketing
mix reinvestment
Source: Exane BNP Paribas estimates

Even a 5% shortfall in revenue would have dire consequences on hotel profits,

however, and in our scenario above the deflagged hotel risks taking a -22% hit to its
EBIT. Obviously, this scenario is very sensitive to assumptions on marketing ratios (we
assume 15% or 1/6 payback) and on the proportion of revenue that is tied to the brand
(we assume only OTA volumes are untouched, but high-profile hotels or hotels with
“captive” audiences e.g. conference centres could feel more optimistic).

Figure 72: … and an even bigger hit to the bottom-line, except for those who drive their own volumes
Deflagging scenario – Base case – EBIT impact* Deflagging scenario – Base case – Assumptions
20 100% 100%

15 50% 50%
15
8% 15%
12 0%
Other 3rd parties

Brand.com
OTA

Direct

Other brand channels

Savings

Marketing ratio

10

0
0
Current Deflagging Marketing
mix reinvestment Brand reliance Reinvestment
Source: Exane BNP Paribas estimates. *Rebased to hotel revenue = 100

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 49

 Beyond the lost revenue and the risk of negative operating leverage, deflagging also
brings the risk of higher costs on a number of cost items:

– OTA commissions. We estimate that large hotel chains negotiate OTA

commissions between 10% and 15% on average on behalf of their franchisees,
compared to the 15% - 25% charged by OTAs to independent hotels. On average
these 8pt lower commissions alone can cover the added cost of the royalty fees and
sales and marketing fees. Furthermore, we see evidence of commissions trending even
further downwards for the leading hotel chains with Marriott CEO Arne Sorensen
quoted by Reuters earlier this year saying “We would certainly like to pay less.” The
wider the gap between franchisee and independent commissions, the worse the
economics to deflag.
– IT and system costs. A number of software-as-a-service providers offer booking
systems that can replace the brands’ central reservation platform on a pure
transactional model, but we believe very few can compete with the c. 2% of room
revenue charged by hotel chains to their franchisees. A review of some of the readily
available third party systems shows a suite of products with the most basic packages
costing c.1% room revenue (e.g. Cloudbeds) with more premium offerings including
support costing closer to c.5% room revenue (e.g. ResortDataProcessing).
– Procurement. Independent hotels can use Group Purchasing Organisations
(GPOs) such as FoodBuy, Entegra, or Avendra for their procurement needs for food,
beverage, and sundry items. But a value-add hotel chain will not only give its
franchisees access to negotiated prices, but also pre-purchase and effectively “curate”
the food offer and amenities standards to reflect consumer trends and its wider insight
on guest expectations.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 50

 Airbnb and alternative accommodation

– Airbnb controls the largest accommodation inventory in the world with c.5m listings.
However adjusting for availability and occupancy we estimate that Airbnb’s market
share of the global accommodation market is closer to c. 3%.
– In a pure “volume” approach, the company’s reported 2020 target could imply
Airbnb becoming the world’s largest accommodation provider and accounting for c.75%
of accommodation growth, however we would expect management targets have been
rebased to reflect recent regulatory changes, and revenue streams diversified.
– Airbnb continues to be the fastest growing accommodation provider with additional
potential for disruption from its move to target corporates. Yet overall we expect Airbnb
to deliver a lower quantum of growth as the last 4/5 years, creating a small and
absorbable industry headwind rather than any incremental disruption.

Alternative accommodation
Vacation rentals, hostels, room-sharing, tents and igloos are all alternatives to staying
in a hotel. We see the alternative accommodation market (including Airbnb) at c.25% of
the accommodation market. Difficult to track, we estimate that the alternative
accommodation market has been losing share to hotels over the past 15 years with a
trend towards professionalization. We expect this trend to reverse across the coming 5
years with growth being driven by Airbnb.

Figure 73: Alternative accommodation represents c.25% of the market

Global accommodation market breakdown – USDbn (2017)
Hostels
1%
Cruises
7%

Other alt.
accom.
Hotels Alt. accom. 7%
75% 25%

Other
private rental
6%

Airbnb
Homeaway 3%
1%
Source: Exane BNP Paribas estimates, Wyndham Hotels & Resorts Registration statement, STR, Airbnb,
Phocuswrite, Booking.com, Expedia, Colliers, Accor

We focus on Airbnb given it is the largest and best positioned competitor however at
c.$170bn there is a vast alternative accommodation market with diverging trends:
– Private rental. A market losing share to the professionalised hotel sector, the home
and vacation rental market has seen a rebirth through a number of successful online
marketplaces. Platforms such as Airbnb and Homeaway (owned by Expedia) are
rapidly gaining market share but also driving the growth of the sector as the process of
property sharing is simplified.
– Cruises. Demand for cruises continues to steadily rise, benefitting from ageing
populations and the growing middle class in emerging markets.
– Hostels. Colliers estimated the global hostel market at c.$7bn in 2017 or c.1% of
the hotel market, however growing more quickly at c.8% p.a. The hostels market is very
fragmented with A&O the largest operator running just 30 hostels.
– Other alternative accommodation. Includes a variety of options from camping to
glamping, barges to couch surfing.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 51

 The Airbnb story
Since its founding in 2007, Airbnb has built the leading room sharing platform and with
c.210m nights booked in 2017 Airbnb entered the top 5 global accommodation
providers in the world. However Airbnb has only acquired c.3% of global room revenue
while one would be hard pushed to point to the disruptive impact on the performance of
hotels. We discuss the business model, the growth outlook and the implications.

Figure 74: Airbnb has rapidly grown to become a top 5 global accommodation provider
Airbnb nights booked (m) – Exane estimates Largest accommodation providers nights booked (m)
250 350

300
200
250

150
200

150
100

100
50
50

0 0
2011

2012

2013

2014

2015

2016

2017

Accor

Jin Jiang

Hilton
Wyndham

Airbnb

Marriot
IHG
Source: Exane BNP Paribas estimates, Accor, Jin Jiang, IHG, Wyndham, Hilton, Marriott. Note: Nights booked calculated assuming rooms available
365 days a year at company disclosed FY17 occupancy rate.

The business model

Founded in the attic of founders Brian Chesky and Joe Gebbia, the proposition has
developed from offering air beds and breakfast (Airbnb) in spare rooms targeted at US
conventions to being an online marketplace facilitating the rental of over 5m listings
across c.190 countries.
– Home booking is the core business, with landlords able to list either part or the
entire of their homes on the marketplace. Customers have access to photos and
customer reviews to aid their decision making. Airbnb makes the bulk of its revenue
from charging guests a service fee which is typically between 6-12% of the booking
subtotal (with an inverse correlation to the absolute booking size). Additionally Airbnb
charges a c.3% host service fee to the landlord (in theory to cover the cost of
processing the payment).
– Experiences & Restaurants are recent extensions which Airbnb has begun to offer
so that it can leverage its traffic. It typically charges a c.20% commissions to partners.

Figure 75: Home rental platforms typically earn service fees from Guests
Fee structure for an average $100 booking for an independent accommodation provider
Direct booking OTA Airbnb Homeaway
Booking value 100 100 100 100
Guest service fee 0 6-12% 10-13%
Host revenue 100 91.0 88.5
Host service fee 15-25% 3.0% 2.5%
Host income 100 80.0 88.0 86.0
Comment The most profitable transaction, Typically charge an all-inclusive - Hosts historically paid an
however excludes the cost of commission starting at 15% annual listing fee of $350-
acquiring customers. and (often for premium $1,249, now transitioning to a
services) rising to 25% 10-13% service fee model.
Best suited Strong silo branding Hotels and hostels General rentals Luxury rentals

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 52

 Growth so far: Airbnb has taken 3% share of the accommodation market
The business was founded in 2007 however growth only really started to take off after
2009 when Airbnb joined American seed incubator Y Combinator. It completed its
Series A funding round in November 2010 raising $7.2m from Greylock Partners and
Sequoia Capital. On this occasion, it also announced that of 700k total nights booked
since inception, 70% had occurred in the prior 6 months, suggesting annualised volume
had reached c. 1m nights sold for the first time. Since then growth has been largely
organic fuelled through additional funding rounds taking total funding to c.$4.4bn since
inception with the most recent round valuing the business at c.$31bn. Our estimates
below are pulled together by triangulating a number of sources including company
press releases and news reports. According to Bloomberg (6th February 2018), Airbnb
achieved c.$2.6bn revenue in 2017 at a growth rate of c.55% coinciding with the
business becoming profitable for the first time with EBIT of $93m.

Figure 76: Despite its scale, Airbnb still grew >50% in 2017
Nights booked (m) Room Revenue ($m)
250 3,000

212 2,600
2,500
200

2,000
150

1,500

100
1,000

50
500

0 0
2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017
Source: Exane BNP Paribas estimates

Airbnb is present across c.200 countries with c.5m listings making it the single largest
accommodation network in the world (Marriot is the second largest with 1.2m rooms).
However its impact in terms of global room revenue is much smaller given a lower
availability rate, occupancy rate, and average booking cost.

Figure 77: Airbnb controls c. 12% of global accommodation listings but only c. 3% of market value
Global accommodation listings 2017 (m) Global accommodation room revenue 2017
Airbnb, Airbnb,
4.8m, 12% $21bn, 3%
Alt. accom.,
$194bn,
27%

Alt. accom.,
18.9m, 46%

Hotels,
17.0m, 42%

Hotels,
$507bn,
70%
Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 53

 2020 targets: how much impact will they have on the market?
In an interview earlier this year, Airbnb CEO Brian Chesky confirmed ambitions to go
public, however ruled out a 2018 listing. In early 2017 Fortune (15th February 2017)
reported that Airbnb is said to be targeting 2020 revenue of $8.5bn, implying a growth
CAGR of c.50%, with EBIT of $3.5bn. But what would this imply for the market?

(1) Worst case: Airbnb could as much as triple their accommodation market share,
overtaking Marriott to become the largest accommodation provider by room revenue.
With Airbnb accounting for c.75% of the growth in the global accommodation market
over this period, this would imply a limited growth outlook for hoteliers and a less
digestible impact than in the past 5 years. In this scenario, we assume that Airbnb’s
2020 target are achieved through an aggressive, pure volume strategy, with all of the
incremental 2018-2020 revenue generated from additional nights sold, at constant
commissions.

(2) Central case: Airbnb’s market share would grow by c.2.5x. While the impact on the
rest of the hotel market would be less drastic, we would still expect a visible drag on the
RevPAR outlook. This is assuming a balanced growth strategy driven more equally by
volumes, commissions, and small contribution from new businesses.

(3) Best case: Airbnb’s market share would less than double to “only” 5.5%, still
leaving it as the second largest accommodation provider globally. The incremental
+2.5pt impact would be lower compared to that across the previous 5 years, which has
been difficult to isolate. In this scenario, we have assumed that $1,900m of the
incremental revenue target was generated through new income streams such as
Experiences and Distribution, and that Airbnb increased their average commissions,
requiring the least additional growth in the core home rental business.

Figure 78: Airbnb market share could further increase by 2x to 3x by 2020e

Scenario analysis around Airbnb’s $8.5bn 2020 revenue target
Year 2017 2020E
(1) (2) (3)
Scenario
Worst Central Best
Assumptions Low accommodation market Medium accommodation High accommodation market
growth, stable average fee, market growth, some increase growth, large increase in
limited new revenue sources in average fee, $500m new average fee, $1bn new
revenue sources revenue sources
Room nights sold 212 689 615 536
Global accom. room revenue ($bn) 701 766 788 811
- estimated growth % 3% 4% 5%

Airbnb revenue ($m) 2,600 8,500 8,500 8,500

- Other revenue ($m) 0 0 500 1,600
- Implied home booking revenue ($m) 2,600 8,500 8,000 6,900

Avg. home booking fee ($) 12.3 12.3 13.6 15.4

Home booking room revenue ($bn) 21 69 59 45
- CAGR % 48% 41% 29%
Share of total global accommodation 3.0% 9.0% 7.5% 5.5%

Source: Exane BNP Paribas estimates

Three elements can be debated further: Firstly whether those 2020 targets are still
achievable following one year of delivery and an uncertain regulatory backdrop.
Secondly how much of the incremental room revenue growth will come from Corporate
Bookings. Thirdly, how reliant those targets are on ancillary revenue such as
“experiences” and on OTA-like distribution revenue from existing hotel supply, that do
not pose a direct incremental threat to hotel operators.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 54

 Figure 79: Airbnb on track to become a top 2 accommodation provider
Estimated 2020 room revenue ($bn)

80
69
70 64
59
60

50 45
39
40 35

30

20

10

0
IHG Hilton Scenario 3 Scenario 2 Marriott Scenario 1

Source: Exane BNP Paribas estimates

How realistic are reported targets?

Our analysis above is based on the 2017 targets reported by Fortune (2020 revenue of
$8.5bn implying a 2016-20 growth CAGR of c.50%).

But the $2.6bn of revenue effectively delivered in FY17 was below the $2.8bn “budget”
cited in the same Fortune article outlining the 2020 plan. While revenue growth of
c.55% was optically above the targeted c.50% CAGR, it now requires bold assumptions
to assume Airbnb can sustain the exact same levels of growth for another 3 years
without modelling any deceleration. We would expect this is now an ambitious
milestone and for future guidance to come in below this level.

This would not be the first time that Airbnb have rebased forecasts, with press reports
in 2015 (Business Insider 26th May 2015) suggesting 2020 revenue targets of $10bn.

Has regulation already curbed Airbnb’s growth trajectory?

A plausible explanation for this weaker growth is coming from a raft of regulation hitting
Airbnb across a number of key cities / countries. The argument goes that residential
properties are being inappropriately used for short-term lets driving higher profits,
resulting in upwards pressure on rents and ultimately pricing out local residents.
Regulation has come in various forms although most typically through capping the
number of nights a property can be used for short-term rental and requiring properties
to register with local authorities.

Figure 80: Short-term lets have been facing increasing regulatory pressure
Notable short-term rental limits and recent regulatory developments across key Airbnb cities
City Short-term rental limit Recent regulatory developments
July 18 - new law forces home-sharing companies to on a monthly basis publish details of its hosts
New York 30
including number of nights and price.
Jun 18 - property owners need to register with local authorities who will conduct fire and safety
Japan 180
checks while a cap of 180 days was introduced while local governments can apply stricter laws.
Jun 18 - Airbnb agreed with local authorities to share data in an attempt to crack down on illegal
Barcelona 90
vacation apartments.
Jan 18 - hosts are required to register with the council, limit occupancy to four people and the short-
Amsterdam 60
term limit will reduce to 30 days in 2019.
Jan 18 - Rentals capped at 90 days, all hosts must be full-time residents and owners must register
San Francisco 90
properties ($250 fee).
Paris 120 Dec 17 - properties need to register with their local tax authority.
London 90 Sep 17 - the government introduced a 90 day limit for London homeowners

Source: Exane BNP Paribas estimates, Airbnb, Telegraph, New York Times, Business Insider, City Lab, Lonely Planet, Engadget, Tech Crunch

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 55

 The impact of this regulation on listings, and therefore the progress of Airbnb, has been
mixed. Much of the early regulation had a small impact with property owners either
side-stepping or simply ignoring the rules. However there is a growing trend of
governments requiring greater transparency from the platforms and requiring them to
share more information, in effect allowing regulators to clamp down on illegal listings.
For example, in January 2018, Airbnb was forced to remove hosts in San Francisco
who had failed to register with the city resulting in listings dropping by c.45% from the
c.10k listings in September.

Anecdotal evidence from the few listed players that had ventured into the home rental
business through acquisitions suggests that these regulatory changes may have
weighed on growth in the past year:

– Expedia shares are 15% lower than in October 2017 with mixed performance at its
accommodation sharing platform Homeaway partly to blame with growth coming at a
greater cost than anticipated. On regulation, HomeAway President John Kim said “the
whole category has been villainized”.
– Accor acquired luxury serviced homes company Onefinestay for $170m in April
2016. With synergies failing to materialise and CFO Jean-Jacques Morin on the H118
results call referring to “the same regulation that you have got on Airbnb, it did have an
effect on us”, management almost entirely wrote off this acquisition in July this year.
– Hyatt invested an undisclosed amount on private accommodation provider Oasis in
2017, however in August revealed a $22m impairment charge related to this investment
having “underperformed our expectations as it relates to the scalability of that business
and the synergies to be realised through alliance with Hyatt”.

Corporate bookings
The debate around the impact of alternative accommodation on hotels is inconclusive
while an easy dismissal by the hotels is that any impact is limited given their high
exposure to corporate business (we estimate 50% and above). However Airbnb has
ambitions to bulk out its corporate proposition.
In 2014 ‘Airbnb for Business’ was launched with the intention of providing corporates a
more professional service both through the platform functionality but also through more
business-appropriate accommodation. This area was rebranded as ‘Airbnb for Work’ in
August 2018. Airbnb claim to have worked with almost 700k companies and are directly
engaged with 275k including 63% of the Fortune 500. The proposition is still evolving
but in its current state, customers have access to:
– Work friendly accommodation: Wifi and a workspace, flexible cancellation policies
and self-check-in.
– One-click expensing for the employee and integration into corporate booking
platforms: expense management platform Concur agreed in August to integrate Airbnb
onto its platform. Airbnb also works with Carlson Wagonlit Travel, BCD Travel, iJet,
Global Business Travel and others
– WeWork day pass: complimentary day at WeWork’s co-working spaces including
access to a private desk, one hour of conference room time, and printing services.

In an interview with Reuters, Jon Liebtag, the head of business travel for EMEA at
Airbnb, reportedly saw some 15% of nights booked as corporate with a goal to lift that
to c.30% by 2020. Applying this goal to our “base case” scenario of total 2020E room
booking revenue of $59bn would imply corporate booking room revenue of c.$21bn or
c.8% of the total corporate accommodation market.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 56

 Figure 81: Airbnb market share of corporate room revenue could rise to c.8%
Corporate room revenue forecasts in Exane Base Case 2020 scenario
2014 2017 2020E 2014-17 2017-20
CAGR CAGR
Nights booked (m) 39 212 591 76% 41%
% corporate 10% 15% 30%
Corporate nights (m) 3.9 31.9 175 101% 78%
Average fee ($) 120 120 120
Airbnb corporate room revenue ($bn) 0.5 3.8 21.3 101% 78%
Source: Exane BNP Paribas estimates, Reuters, Bloomberg, Airbnb

Experiences, ancillary and other non-room revenue

In November 2016, Airbnb expanded from its core accommodation service by
launching ‘Airbnb Trips’, designed to aid travellers with what they do as well as where
they stay. The three key areas of expansion are in experiences, Places & Homes with
Flights & Services to come in the future:
– Experiences. Handcrafted experiences designed and led by local experts e.g.
Samurai workshop, Truffle hunting in Tuscany
– Places & Homes. Recommendations and tours by local experts to help track down
the hidden gems off the beaten track.
– Flights & Services. Simplify the travel booking process by offering everything
through Airbnb.

In a press release from earlier this year, Joe Zadeh, Airbnb’s Vice President of Trips,
stated that “This year we’re going to expand to 1,000 cities” by the end of 2018
compared to just 60 destinations at the start of this year. Additionally, in an interview
earlier this year, CEO Brian Chesky mentioned the Trips business could achieve
c.1.5m experiences on an annualised basis. The Trips business is described to be
growing significantly quicker than the core home bookings was to start with,
nevertheless given the early stage roll-out we see high variability in the growth potential
and in our base case we see the business growing to c.$500m.

Figure 82: Trips to contribute to $500m of revenue target in our base case
Exane estimated potential for Trips
$m 2016 2017 2018 2019 2020
Trips 0 1 9 17 26
- growth % nm 750% 100% 50%
Capture as % of bookings 0.0% 0.5% 2.8% 4.0% 4.2%
Average price 100 100 100 100 100
Commission 20% 20% 20% 20% 20%
Trips Revenue 1 20 170 340 510
Share of AirBnb revenue 0.0% 0.8% 4.4% 5.9% 6.0%

Source: Exane BNP Paribas estimates, Airbnb

Airbnb is also growing an OTA-like distribution revenue stream

Given the increasing regulatory scrutiny on short-term lets and company targets to
expand its corporate proposition, Airbnb is expanding its offering of professional
accommodation and effectively adding OTA capabilities to its platform.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 57

 For years customers have had access to a small range of typically independent hotels
and B&Bs through Airbnb. However since early 2018 the company have made a
concerted effort to grow its supply of professional offerings. For Airbnb, expanding its
listings improves customer choice while offering a more professional service draws the
business model closer to that of the OTAs. Crucially however, Airbnb is not allowing
just any hotel to upload itself onto the platform. It is looking to partner with ‘boutique’
hotels offering unique designs, a flavour for the local culture, a communal area and an
engaged host. For the independent hotels, Airbnb offers a significantly more attractive
commission offering with the service and guest fee of 10-15% significantly below the
c.25% that OTAs can charge some independent hotels.

In February 2018, Airbnb formed a technology partnership with SideMinder, a cloud-

based hotel distribution platform used by >28k hotels. On the assumption that these
hotels meet certain Airbnb criteria, they will be able to list inventory on Airbnb, sharing
real-time availability, rates and content.

While it is unclear to us how “OTA-like” commissions will be reported, any growth in this
pure “hotel distribution” model should not be seen as an incremental threat to the hotels
market (contrary to growth in core home rentals).

Assessing the longer-term potential: 1 billion room nights

A different way to consider the growth potential and therefore threat is pointing to some
of Airbnb’s more mature cities as case studies. “Inside Airbnb” data shows that Paris is
the city in which Airbnb has the most listings in the world at c.60k. This compares to
c.70k hotel rooms in Paris (STR) implying there are 85 listings on Airbnb for every 100
hotel rooms. This ratio compares to c.28 Airbnb listings for every hotel room at the
global level. Were we to assume the rest of the world could achieve a similar maturity
as Paris, this would imply the potential for listings on Airbnb to triple. Furthermore,
occupancy for the Airbnb estate is significantly below where it is in more mature cities
such as Paris with consumer awareness to continue to grow as a result of marketing /
the network effect. Was occupancy to rise to c.20% globally (still below the level
estimated by “Inside Airbnb” for Paris) then this would imply nights booked could
increase five-fold to one billion nights sold. All in all our three scenarios above, which
range between 535-690m nights sold by 2020e, are well within this theoretical growth
blue sky.

Figure 83: Extrapolating Paris would suggest Airbnb can grow 5-fold
Extrapolation of trends seen in the Paris accommodation market
Airbnb Hotels Ratio*
(Airbnb / Hotels)
Paris - 2017
Rooms (k) 60 70 86%
Occupancy (%) 25% 80%
Nights sold (m) 5.4 20.4 26%
Avg cost / listing ($) 125 175
Room revenue ($m) 671 3577 19%

Global - 2017
Rooms (m) 4.8 17.0 28%
Occupancy (%) 12% 70%
Nights sold (m) 212 4,344 4.9%
Avg cost / listing ($) 100 117
Room revenue ($bn) 21 508 4.1%

Global potential @ Paris metrics

Rooms (m) 14.6 17.0 86%
Occupancy (%) 20% 70%
Nights sold (m) 1,064 4,344 24%
Avg cost / listing ($) 100 117
Room revenue ($bn) 106 508 21%

Source: Exane BNP Paribas estimates, STR, Airbnb, Inside Airbnb. *Ratio (AirBnB vs Hotels) used for this
analysis differs from market shares (AirBnB as % of Hotels + Alternative Accommodation) discussed above.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 58

 Valuation range: $31-45bn subject to delivery on the 2020e targets
Airbnb CEO Brian Chesky has publicly ruled out a 2018 listing, however in June it was
announced that employees would receive a cash bonus and that the company is
aiming to go public “before late 2020” when some employees’ stock grants expire. The
valuation at which the company eventually lists will depend on market trends and on
the credibility of any targets the company choses to outline to the market. Our starting
reference point is monitoring the companies funding rounds, with the most recent
funding round in March 2017 implying a pre-money valuation of $31bn.

Figure 84: Airbnb has raised c. $3.4bn so far, and was valued at $31bn in its latest funding round
Airbnb capital raise history
Funding round Date Cash raised ($m) Lead investors Pre-money valuation ($bn)
Seed round 1 Jan-09 0.02 Y Combinator n/a
Seed round 2 Apr-09 0.6 Sequoia 0.003
Series A Nov-10 7.2 Greylock 0.072
Series B Jul-11 112 Andreesen Horowitz 1.2
Series C Oct-13 200 Founders Fund 2.3
Series D Apr-14 475 n/a 9.5
Series E Jun-15 1500 Tiger, Hillhouse, General Atlantic 20.0
Series E Nov-15 100 Firstmark 24.5
Series F Sep-16 556 CapitalG, TVC 30.0
Series F Mar-17 448 CapitalG, TVC 31.0

Source: Exane BNP Paribas estimates, TechCrunch, CBInsights

To get a sense for what this valuation implies, the table below calculates the implied
multiple for Airbnb at the $31bn EV on the 2020 targets of $8.5bn revenue and $3.5bn
EBIT. We look at these relative to the US listed OTAs whom we expect to be the key
peers given the sector overlap and commission-driven business models. Focussing on
2020e year multiples to account for the faster near-term growth profile, at such a
valuation Airbnb would be valued in the mid-range of Expedia and Booking.com on
Gross bookings and Sales multiples, however at a significant discount on FY20e EBIT.

Figure 85: Assuming it achieves its 2020 targets, Airbnb could look cheap on EBIT multiples
Valuation multiples comparison
EV / Gross bookings EV / Sales EV/ EBIT
FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20 FY17 FY18 FY19 FY20
Airbnb @ $31bn 1.5x 1.0x 0.7x 0.5x 11.9x 8.0x 5.4x 3.6x nm. 49.9x 18.9x 8.9x

Expedia 0.23x 0.21x 0.19x 0.17x 2.0x 1.9x 1.7x 1.5x 31.7x 18.6x 16.4x 12.6x
Booking.com 1.1x 1.1x 0.9x 0.8x 6.9x 6.7x 6.0x 5.4x 19.1x 18.2x 15.6x 14.0x

Source: Exane BNP Paribas estimates, Thomson Reuters, Expedia, Booking.com Calendar years priced as at close on Friday 28th Sept.

This is subject to achieving ambitious targets, but overall Airbnb’s margin target of
c.40% could suggest management and shareholders will aim for a valuation not
dissimilar to that achieved by Booking.com. With the company only just having
achieved break-even, we would expect a valuation range somewhere between that of
the most recent funding round, and that achievable were the business to eventually
trade in-line with the c. 13x 2020 EBIT on which the OTAs trade, i.e. a valuation range
of $31-45bn.

Impact on hotels
Despite Airbnb having grown to c.3% of the global accommodation market in a
relatively short period of time, the headwind to hoteliers is hard to disaggregate.
Arguments range from Airbnb’s growth coming at the expense of the alternative
accommodation market or that it is growing the accommodation market by untapping
access to new supply.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 59

 Our analysis above suggests Airbnb is likely to deliver a similar level of growth in the
accommodation market as that delivered across the prior 4/5 years implying a similarly
small but absorbable headwind. Key factors to monitor will be:

– IPO guidance – as mentioned, we see downside to management targets, however

management may consider additional funding as an additional driver of growth.
– Corporate success – while Airbnb’s proposition has certainly improved, there is
little evidence to date that corporates are fully embracing shared accommodation.
– Regulatory developments – regulation has tended to be a growing hurdle for
Airbnb, however with room caps already implemented in some of the key gateway
cities and “formal” oversight unlocking new supply (Temples in Japan), regulation will
not necessarily remain a net negative for Airbnb.
– Reacceleration of growth – a spike in regulatory hurdles in 2017 and 2018 may be
considered a one off shock to listings, creating a cleaner base from which the business
can return to higher growth.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 60

 Cycle view: “late cycle” can last for a while

– The hotels market is in a late-cycle phase, with occupancy having recovered to

above peak levels in all key markets and RevPAR growth moderated to low single digit.
We forecast FY18e-FY20e RevPAR CAGRs of +2.7% for IHG, +3.7% for Accor, and
+0.7% for Whibread’s Premier Inn.
– The US looks stretched with “Real” hotel prices now +2.8% above their 2007 peak,
but demand remain strong and a benign level of supply growth means occupancy can
still nudge up. US macro exposure remains a solid risk-reward provided it is
complemented with some micro momentum (brand launches, cost synergies).
– Europe has more material pricing upside (“Real” RevPAR still -8.5% below peak),
while the UK faces more demand uncertainty and a less favourable supply picture.

Regional summary and our RevPAR forecasts

The hotels cycle is now 8 years into its recovery from the 2010 troughs. While the US
market optically looks peakish, we point to still solid demand and supply growth below
red flag levels as supportive of “inflation+” RevPAR growth (EBNPP IHG Americas
FY19e +2.0%). Europe is more attractive on paper with 9% upside to peak RevPAR,
although the path to recovery has been wobblier and may rely disproportionately on
volatile Leisure demand in gateway cities (EBNPP Accor Europe FY19e +4.0%). The
UK market also has theoretical macro upside, but is very much dominated by micro
concerns, with the most potentially damaging supply growth forecasts (particularly in
London).

Figure 86: Europe has the most upside to peak RevPAR, the US looks stretched but demand remains solid
RevPAR cycle – Regional overview
Current vs Peak 2018 year to date trends* FY19e forecasts
Real RevPAR Real ADR RevPAR GDP Supply GDP Supply
US 8.2% 2.8% 3.4% 2.9% 2.0% 2.5% ▼ 1.9% =
Europe -8.5% -13.9% 3.4% 2.2% 1.0% 1.9% ▼ 1.0% =
UK -1.6% -6.7% 1.7% 1.3% 1.6% 1.5% ▲ c. 2.9% ▲

Source: RevPAR vs peak: Exane BNPP estimates based on STR data and Bloomberg CPI data. Year-to-date data: STR data, Bloomberg GDP data.
Supply forecasts: STR press release (US), EBNPP estimates (Europe), PwC press release (UK). GDP forecasts: Exane BNP Paribas Economics
research. *January-August 2018

In the table below we show our RevPAR forecasts by division.

Figure 87: Like-for-like RevPAR growth – EBNP forecasts

2015 2016 2017 2018e 2019e 2020e
IHG
Americas 4.6% 2.1% 1.6% 2.5% 2.0% 2.0%
EMEAA 5.4% 0.9% 4.2% 3.0% 3.0% 2.5%
Greater China 0.3% 2.2% 6.0% 8.0% 6.0% 5.0%
Group 4.4% 1.8% 2.7% 3.3% 2.8% 2.5%

Accor
Europe - - 5.0% 5.2% 4.0% 3.5%
AsPac - - 5.8% 4.8% 5.0% 4.5%
MEA - - 0.8% 0.0% 2.0% 2.0%
NCAC - - 5.7% 4.2% 3.0% 2.5%
South America - - -3.4% 6.5% 6.0% 4.0%
Group 2.3% 1.1% 4.7% 4.6% 4.0% 3.5%

Whitbread*
Accommodation LFL RevPAR 2.6% -0.5% 0.3% -1.0% 0.5% 1.0%
Food & Beverage LFL 0.8% 0.3% 0.4% -1.0% 1.0% 1.0%
Premier Inn LFL (total) 3.1% 1.7% 1.5% 0.0% 1.3% 1.3%

Source: Exane BNP Paribas estimates, *closest fiscal to calendar year (n-1)

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 61

 US: back at peak, but still healthy demand and benign supply
How to answer the question “where are we in the cycle?”. Starting with the US market,
using a combination of Smith Travel Research (STR) data and historical CPI data, we
have arrived to the following “US RevPAR cycle” trajectory in the chart below.

The horizontal axis shows our estimate of “Real” US Average Daily Rates, on a 12-
month rolling basis, averaged across quarters. We have indexed this “Real ADRs
Index” to the Q407 peak level, and adjusted for inflation. In other words, a level of 100
indicates that pricing is back to peak levels. The vertical axis shows US Hotels
Occupancy, also on a 12-month rolling basis, and averaged across quarters.

Figure 88: The US Hotels cycle has gone full circle, but demand remains strong
US Hotels – Real ADR* and Occupancy through the cycle (2007 USD, quarterly average)

68%
3 Q318
66%

64%
Q407
2
Occupancy (%)

Peak
62%

60%

58%
1
56%
Q110
54%
Trough

52%
85.0 87.5 90.0 92.5 95.0 97.5 100.0 102.5 105.0
EBNPP Real Average Daily Rate (USD*)
Source: Exane BNP Paribas estimates based on STR data and Bloomberg CPI data. *indexed to Q407 = 100

The sequence of events in the current hotel cycle went as follows:

– Downturn. From the Q407 peak and as the US economy plunged into recession,
US RevPAR came down by c. -22% in the space of 9 quarters with both prices and
occupancy coming down at the same time. Supply growth levelled off immediately but
remained close to c. 2.5% as planned openings were not all scaled down.
– Recovery – Phase 1. From the Q110 trough, the first signs of improvement
materialised through a progressive rebuilding of Occupancy. Rates remained close to
their trough levels. Through this period supply growth also improved massively,
reducing sharply to close to 0% by 2012. This “Occupancy only” phase accounted for a
c. +11% recovery in RevPAR from the trough.
– Recovery – Phase 2. Starting from Q112, as Occupancy had recovered to a critical
level of c. 60% through the combined effect of demand recovery and muted supply,
pricing started to kick in, and for the following 5 years US RevPAR growth was driven
by both rates and occupancy. This longer, more balanced phase of the recovery
accounted for another c. +24% RevPAR improvement from low levels.
– Recovery – Phase 3. With prices having now surpassed their prior peak level and
supply having progressively returned to long-term average levels of c. 2%, all of the
incremental demand since Q117 is materialising through Occupancy again.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 62

 All in all we estimate that in real terms, US RevPAR is now c. 6.1% above its Q407
peak. We are tempted to give operators the benefit of improved occupancy, which
represents about half of this: US hotels have overall become better operators through
this cycle. But pricing is now starting to look stretched with our estimated Real ADR
+2.8% above the Q407 peak. Only the benign supply picture still makes US exposure
an acceptable risk/reward, but in any case macro alone may not be enough to get
investors excited, and as far as US exposed companies are concerned we would
favour operators with strong “micro” momentum (brand launches or relaunches,
pipeline strength, or cost savings / synergies).

Note that our estimated “Real ADR” index is sensitive to our inflation assumptions.
Pushbacks against using CPI include its lower relevance to Business travel demand
(demand side) or to real estate market dynamics (supply side), and choices of
alternative proxies include demand-side pricing measures such PPI, or supply-side
real-estate price indices such as home sales values. Our price index would stand only
slightly differently if we were to use different inflation proxies however, with the general
message that US pricing is back at peak unchanged.

Figure 89: Inflation metrics all produce the same message: no pricing upside
EBNPP US “Real ADR” Index – Sensitivity to inflation assumptions
Inflation proxy US CPI US PPI US Real Estate Sensitivity
Q407-2018 ytd 1.7% 1.8% 1.8% 1.0% 1.5% 2.0% 2.5% 3.0%
Real ADR index 102.8 100.8 100.4 111.3 105.5 100.1 94.8 89.9

Source: Exane BNP Paribas estimates, DataStream CPI - All, PPI – Final Demand from 2010, Finished Goods
before 2010, National Association of Realtors Existing home sales.

The Americas region has seen strong recent RevPAR performance, and has been
flagged by IHG in H118 as continuing to benefit from record industry demand,
accelerating GDP growth, improving corporate profitability and high consumer
confidence. However, IHG management also noted that the most recent RevPAR
performance has benefitted from exceptional demand in hurricane-impacted areas in
late 2017, and that this is now starting to diminish.

Figure 90: Americas RevPAR has surprised, but we would expect a return to “inflation+” trends
Accor and IHG - Americas like-for-like RevPAR trends
Years to end December FY15 Q116 Q216 Q316 Q416 FY16 Q117 Q217 Q317 Q417 FY17 Q118 Q218

IHG - Americas 4.6% 1.9% 2.8% 1.9% 1.5% 2.1% 2.2% 0.1% 0.8% 3.5% 1.6% 2.9% 3.4%
Accor - NCAC* -5.3% 0.6% -1.5% 13.5% -2.8% 2.4% 3.6% 2.0% 6.4% 6.2% 5.7% 8.4% 2.0%

Source: company data, *NCAC (North America, Central America and the Caribbean) shows total Americas before Q117

Europe: still material pricing upside, but demand has been volatile
Compared to the US, Europe is still at an earlier stage of its recovery: we estimate that
Europe “Real” RevPAR is still c. -8.5% below its 2007 peak, with most of the upside in
pricing (-13.9%). Having rebuilt its Occupancy to a critical level, European hotels could
start to see some pricing power if demand was to remain solid. Interestingly Europe
has been through similar recovery phases as the US, but each time has also faced
challenges specific to the continent.

Phase 1 of the recovery was wobblier than in the US, with an overall improvement in
Occupancy beginning in Q110, but still with some pricing pressure through 2011 and
2013. We view this more uncertain RevPAR trajectory as a reflection of a mixed macro
environment in the Eurozone in the early years of the recovery, with companies
including Accor at the time describing good trading in Germany and France offset by
softness in Southern Europe.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 63

 In Phase 2, once Occupancy had reached a comfortable level of c. 68%, it looked like
Europe was going to reap the benefits through pricing, with a strong ADR-led
improvement in 2014. But this was interrupted by the aftermath of the 2015 Terrorist
events (most notably Paris in November), which made not only France but most City
destinations in Europe very close to no-go zones for a large portion of global leisure
and business travel.

Figure 91: The European hotels cycle has been a ride, RevPAR is still below peak
European Hotels – Real ADR* and Occupancy through the cycle (2007 EUR, quarterly average)

74%
Q318
72%
3
70%
Occupancy (%)

2
68%
Q407
Peak
66%

64%
1
62%
Q110
Trough
60%
80 85 90 95 100 105
EBNPP Real Average Daily Rate (EUR*)
Source: Exane BNP Paribas estimates based on STR data and Bloomberg CPI data. *indexed to Q407 = 100

It is slightly puzzling to us that Europe would now be in a clear Phase 3, with most of
the RevPAR growth since Q117 driven by Occupancy, and in real terms no real
rebound from the 2016 pricing pressure. June and July 2018 however showed signs of
ADR growth picking up above inflation, and on the H118 conference call Accor CFO
Jean-Jacques Morin commented that Paris has benefited from “much higher room
rates” resulting from a renewed influx of leisure travellers for “several consecutive
quarters”. In other short-term concerns, we note company at IHG and Accor regarding
performance in the German market centres around the trade fair calendar, which
improved through Q218 and is expected to continue to be strong in Q3. Note that
supply is not a major topic with regards to Europe, the region having overall added c.
+0.9% rooms p.a. over 2007-2017.

Figure 92: Europe has been recovering from the weakness caused by Terrorist events
Accor and IHG - Europe like-for-like RevPAR trends
Years to end December FY15 Q116 Q216 Q316 Q416 FY16 Q117 Q217 Q317 Q417 FY17 Q118 Q218

Accor – Europe* 5.7% 1.3% 5.3% 2.3% 3.5% 3.2% 6.0% 2.0% 7.0% 7.0% 5.0% 4.6% 5.9%
Accor – France 0.4% -2.5% -1.9% -5.8% -0.2% -2.8% 5.0% -0.4% 5.0% 7.4% 4.2% 5.2% 5.8%
IHG – EMEAA** 5.4% 1.4% 2.6% 0.0% 3.1% 1.7% 6.9% 5.5% 7.1% 5.6% 6.3% 2.9% 3.0%

Source: company data. *Europe shows NCEE before Q117 (Northern, Central and Eastern Europe, ex. France and Southern Europe). **EMEAA
shows Europe before Q118.

UK: no easy win from Brexit fears, and some supply imbalance
On the face of it, the UK cycle looks to be at a similar “early” stage as the wider Europe
region. We estimate that UK “Real” RevPAR is still c. -2.8% below its 2007 peak, with
c. +6.8% upside in pricing alone and Occupancy at historical highs.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 64

 Figure 93: The UK could have more difficulty recouping the pricing gap
UK Hotels – Real ADR* and Occupancy through the cycle (2007 GBP, quarterly average)

78%
Q318
77%
2 3
76%

75%
Occupancy (%) Q407
74%
Peak
73%

72%
1
71%

70%
Q110
69%
Trough
68%
84 86 88 90 92 94 96 98 100 102
EBNPP Real Average Daily Rate (GBP*)
Source: Exane BNP Paribas estimates based on STR data and Bloomberg CPI data. *indexed to Q407 = 100

If anything the UK has followed a smoother recovery path, with an « Occupancy-only »

Phase 1 starting in Q110 and only slightly distorted by the before- and after-Olympics
supply / demand shock through Q411 – Q412.

The pricing action of Phase 2 started in Q413 and was very much on track until Q415.
The initial reaction to the Brexit referendum has been a softening of demand. But with
the GBP weakness effectively making the UK c. -15% cheaper as a destination, this
was shortly followed by a boost to international inbound volumes that yielded high-
single digit RevPAR growth through Q416-Q317. This pool of opportunistic demand
may have been exhausted, and the UK has since trended around zero “Real” RevPAR
growth, with our estimated Real ADRs now back to their Q416 levels.

Phase 3 may have finally (timidly) started, with Occupancy moving in positive territory
in June and July 2018. Each of IHG, Whitbread and Accor have recently commented
on a subdued UK market however, with RevPAR remaining broadly stable over recent
quarters, driven predominantly by weaknesses in London offset by small increases in
the Regions. Slowing like-for-like RevPAR growth is perceived to be due to a reduction
in inbound travel as sterling has strengthened from the lows, particularly in London
which reaped the most reward from the currency-driven tourism influx a year ago. But
we would be less optimistic about the UK also recouping some of its theoretical pricing
upside, given supply growth having averaged 2% for most of H217, and we would
expect it to remain above trend.

Figure 94: Premier Inn UK is trending at or around zero RevPAR, with openings weighing on occupancy
Premier Inn – UK like-for-like RevPAR trends
Years to end February FY16 Q117 Q217 Q317 Q417 FY17 Q118 Q218 Q318 Q418 FY18 Q119
Regions - -3.0% 1.7% -0.4% -0.8% 0.4% 2.9% 1.0% -0.3% -0.4% 0.9% -0.8%
London - 0.3% -5.5% -4.2% 1.1% -3.1% 3.8% 0.8% -5.7% -3.4% -1.3% -4.3%
UK 2.6% -0.5% 0.1% -1.3% -0.6% -0.5% 3.0% 0.9% -1.5% -1.1% 0.3% -1.6%

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 65

 Valuation

– IHG is good value on 18.0x CY20e P/E for 10.1% EPS growth, and the strongest
FCF yield in the sector.
– Our DCF valuations suggest c. 12% upside for IHG, no material upside at Accor or
Whitbread, with implied EV / EBITDA multiples sense-checked to long-term averages.
– A sum-of-the parts approach is only relevant for Whitbread, following real estate
separations elsewhere. A simplistic sale and lease-back SOP could suggests as much
as 29% upside based on Whitbread’s published property valuation, but we would
suggests a more realistic scenario is closer to +11% upside assuming higher yields and
a de-rating of the resulting operationally-leveraged OpCo.

Relative valuation: IHG is good value on 18.0x CY20e P/E

The three European large cap hotel stocks trade on an average CY20e P/E of 17.8x
(adjusting for cash earmarked for shareholder returns at Accor and Whitbread). This is
consistent with high-single digit EPS growth. Within this peer group we see IHG on
18.0x as good value, with also the strongest Free Cash Flow yield, and credible net
room openings targets driving an EPS growth acceleration into FY20e.

Figure 95: Hotels – Relative valuation

Exane Target Upside P/E EV / EBIT EV / EBITDA FCF yield Div. yield EPS growth
rating price 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e 2019e 2020e

Accor = 42.0 -5% 24.1x 22.2x 19.6x 17.3x 15.8x 14.0x 3.5% 4.0% 2.6% 2.9% 23.3% 8.7%
ex-cash* 22.2x 20.4x

IHG + 5,330 12% 19.8x 18.0x 15.4x 13.8x 13.9x 12.4x 3.6% 4.6% 2.0% 2.2% 6.7% 10.1%

Whitbread = 4,660 -1% 23.2x 21.6x 12.2x 11.5x 9.2x 8.7x 1.4% 1.4% 1.7% 1.8% 7.2% 7.8%
ex-cash* 15.5x 14.4x

Average* 19.4x 17.8x 16.0x 14.5x 13.2x 11.9x 2.9% 3.4% 2.2% 2.4% 13.2% 8.9%

Price Ccy 12m 12m M. Cap. Weekly Stock performance Relative to MSCI Europe
low high (EURm) vols. 1m 3m 12m ytd 1m 3m 12m ytd

Accor 44.2 EUR 40.8 48.6 12,461 30 3% 5% 7% 4% 2% 4% 5% 4%

IHG 4,780 p 3,933 4,966 10,273 20 1% 2% 23% 3% 1% 0% 21% 2%
Whitbread 4,717 p 3,512 4,728 9,713 24 3% 19% 28% 20% 3% 17% 26% 19%

Source: Exane BNP Paribas estimates. All calendarised to end December. Priced as of 28 September 2018 close. .*Accor and Whitbread P/E ex-
cash: Accor adjusting for remaining EUR1,000m of announced buybacks. Whitbread adjusting for GBP2,880m net cash position in FY20e forecasts.

Our price target of 5,330p for IHG is therefore achievable with IHG simply growing into
its current P/E multiple. Our bull case, described in more detail in our separate IHG
note published today (see here), is based on a further acceleration to 6.5% net room
openings and assumes some re-rating to 19.9x.

Relative valuation: putting words on the charts

We believe IHG is the right benchmark for Accor shares now that both companies are
more comparable asset-light operators (although Accor retains a larger property
exposure through its remaining 35.2% stake in AccorInvest). As such the recent
successive optical re-rating and de-rating may not reflect more than the lag in
redeploying the cash proceeds into M&A and buybacks. We believe over time the
multiples should end up broadly in line. A risk to our Neutral stance on Accor is that the
multiple compresses but recent acquisitions, detailed earlier in this note, add more to
earnings than we currently model.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 66

Figure 96: IHG vs Accor – now comparable “asset-light” chains
IHG vs Accor – Share Price performance* IHG vs Accor – P/E valuation

Price Rel. Price 12m P/E Rel.

220%
47.0 170%
45.0x 200%
42.0
150% 180%
40.0x
37.0
130% 35.0x 160%
32.0
110% 140%
30.0x
27.0
120%
90% 25.0x
22.0 100%
70% 20.0x
17.0 80%
12.0 50% 15.0x 60%

7.0 30% 10.0x 40%

Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar Sep Dec Mar Jun Sep Dec Mar Jun Sep Dec Mar
05 06 08 09 10 11 13 14 15 16 18 05 06 08 09 10 11 13 14 15 16 18
Rel. Price (rhs) Rel. 12m P/E (rhs)
InterContinental Hotels Group (GBP) (lhs) InterContinental Hotels Group (GBP) (lhs)
Accor SA (GBP) rebased (lhs) Accor SA (GBP) (lhs)

Source: Exane BNP Paribas estimates. * GBP, rebased to IHG share price

IHG and Marriott have had comparable profiles for longer, but this may still have been
distorted by the final steps of IHG’s asset sales extending well into 2015
(InterContinental Hong Kong property). Looking at recent short term valuation
differentials, we believe Marriott has deserved a 6% - 8% premium to IHG over Q3
2016 – Q22018 as synergies form the Starwood acquisition generated stronger EPS
growth. While not our base case, we believe that IHG could in turn trade a such a
premium to Marriott if management were to accelerate net room openings beyond our
current forecasts of +5.2% by 2020e.

Figure 97: IHG vs Marriott – Most comparable pair, short term earnings momentum can drive a premium
IHG vs Marriott – P/E valuation IHG vs Marriott – EV/EBITDA valuation

12m P/E Rel. 12m 12m Rel. 12m

P/E 160% EV/EBITDA EV/EBITDA
35.0x 20.0x 120%

33.0x 150% 18.0x 110%

31.0x 140% 100%
16.0x
29.0x 90%
130%
14.0x
27.0x
120% 80%
25.0x 12.0x
110% 70%
23.0x 10.0x
100% 60%
21.0x
8.0x
90% 50%
19.0x
6.0x 40%
17.0x 80%
4.0x 30%
15.0x 70%
Jan Oct Jul Apr Jan Oct Jul Apr Jan Oct Jul Apr
Jan Oct Jul Apr Jan Oct Jul Apr Jan Oct Jul Apr
10 10 11 12 13 13 14 15 16 16 17 18
10 10 11 12 13 13 14 15 16 16 17 18
Rel. 12m EV/EBITDA (rhs)
Rel. 12m P/E (rhs)
InterContinental Hotels Group (GBP) (lhs)
InterContinental Hotels Group (GBP) (lhs)
Marriott International, Inc. Class A (GBP) (lhs)
Marriott International, Inc. Class A (GBP) (lhs)

Source: Exane BNP Paribas estimates. * GBP, rebased to IHG share price

Finally, we believe investors looking at Whitbread shares will find a more comparable
benchmarks outside of European listed hotel stocks. Whitbread’s capex-driven “pure
rollout” story, in a context of close to zero like-for-like RevPAR growth in the UK, shares
more similarities with Theme parks and Attractions player Merlin (not covered). In 2015

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 67

 Whitbread went through a period of accelerated capex nearly at the same time as its
UK RevPAR performance decelerated, precipitating a derating. This was mirrored by
Merlin later in 2017, with different drivers: tough London / European city centre tourism
volumes and investments in and accelerated rollout. Unless either capex intensity or
like-for-likes get better, mid-teens P/E multiples may now be right for both stocks.

Figure 11: Whitbread vs Merlin – Capex-driven rollout stories with “zero+” like-for-likes have derated
Whitbread vs Merlin – Share Price performance* Whitbread vs Merlin – P/E valuation

Price Rel. Price 12m P/E Rel.

140% 120%
53.0
24.0x
130% 110%

120% 22.0x
48.0 100%
110% 20.0x
90%
43.0 100%
18.0x
80%
90%
16.0x 70%
38.0 80%
14.0x 60%
70%

33.0 60% 12.0x 50%

Nov Apr Sep Feb Jul Dec May Oct Mar Aug Jan Jun Nov May Nov May Nov May Nov May Nov May
13 14 14 15 15 15 16 16 17 17 18 18 13 14 14 15 15 16 16 17 17 18
Rel. Price (rhs) Rel. 12m P/E (rhs)
Whitbread (GBP) (lhs) Whitbread (GBP) (lhs)
Merlin Entertainments Plc (GBP) rebased (lhs) Merlin Entertainments Plc (GBP) (lhs)

Source: Exane BNP Paribas estimates. * GBP, rebased to WTB share price

DCF valuation: using higher WACCs

Beyond relative valuation metrics, we base our 12-month target prices on a consistent
DCF valuation framework across our Leisure coverage.

In valuing Hotel stocks, we use WACCs between 7.5% and 8.7%, which through our
normative beta assumptions broadly reflect the degree of cyclicality we attribute to the
business. This compares to the more defensive Catering space where we use lower
WACCs of between 7.1% and 7.9%. We also differentiate within the Hotels space itself,
with a higher beta of 1.3x for asset-heavy operator Whitbread compared to 1.2x for IHG
and Accor.

Our margins are kept flat beyond our explicit forecasts period. One other sensitive
assumption is medium-term and perpetuity capex trends, where we assume some
normalisation closer to Depreciation.

Please refer to the company section of this report for our full DCF models for each
company.

As a sense-check, our DCF valuation framework results in implied EV / EBITDA of 8.5x

for asset-heavy operator Whitbread. This compares to Whitbread’s long-term 2001-
2018 average EV / EBITDA multiple of 8.8x, and with Accor trading on a long-term
average of 8.2x before the majority sale of its AccorInvest property portfolio.

It is less straightforward to back our implied EV / EBITDA multiple for IHG and Accor
given that both were still delivering on several large property transactions through to
2014 for IHG and 2018 for Accor, so that there is no reliable long-term history for a fully
asset-light European-listed operator. Our implied EV / EBITDA multiples of 13.7x -
13.8x are broadly consistent with Marriott’s long-term average of 12.5x, keeping in
mind that Marriott itself today has a higher exposure to Owned and Leased hotels than
IHG.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 68

Figure 98: Sense-checking our DCFs: implied EV / EBITDA multiples in line with long-term history
Whitbread vs Accor – EV / EBITDA history* IHG vs Marriott – EV / EBITDA history
14.0x 18.0x
16.0x
12.0x 14.0x
12.0x
10.0x
10.0x
8.0x
8.0x
6.0x

6.0x 4.0x
2.0x
4.0x 0.0x
Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul
01 02 04 05 07 08 10 11 13 14 16 17 01 02 04 05 07 08 10 11 13 14 16 17
Whitbread Accor IHG Marriott
Source: FactSet, Exane BNP Paribas estimates *Accor not shown post sale of AccorInvest

Figure 99: European Leisure – EBNPP DCF inputs

Compass Sodexo Elior SSP Autogrill IHG Accor Whitbread

Cost of Capital
Risk-Free Rate 0.5% 0.5% 0.5% 0.5% 0.5% 1.0% 1.0% 1.0%
Equity Risk Premium 7.5% 7.5% 7.5% 7.5% 7.5% 7.0% 7.0% 7.0%
Beta 1.0x 1.0x 1.1x 1.1x 1.2x 1.2x 1.2x 1.3x
Cost of Equity 8.0% 8.0% 8.8% 8.8% 9.1% 9.4% 9.4% 10.1%
Cost of Debt 5.0% 5.5% 3.0% 5.0% 5.5% 4.0% 4.0% 4.0%
Tax rate 24.0% 29.0% 34.5% 22.0% 25.0% 23.0% 20.0% 20.0%
Equity / EV 85.0% 85.0% 75.0% 70.0% 75.0% 75.0% 70.0% 80.0%
WACC 7.4% 7.4% 7.1% 7.3% 7.9% 7.8% 7.5% 8.7%

Middle period
Number of years 4 4 4 4 4 4 4 4
Growth 4.5% 3.5% 3.0% 4.5% 4.0% 5.2% 5.0% 3.5%
EBIT margin 7.6% 6.3% 4.9% 8.4% 5.3% 48.4% 23.2% 30.9%
Capex / D&A 1.1x 1.6x 1.1x 1.0x 1.0x 1.5x 1.1x 1.8x
Working capital / Revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Tax rate 24.0% 29.0% 34.5% 22.0% 25.0% 23.0% 20.0% 20.0%

Final period
Growth 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
EBIT margin 7.6% 6.3% 4.9% 8.4% 5.3% 48.4% 23.2% 30.9%
Capex / D&A 1.0x 1.4x 1.0x 0.9x 1.0x 1.0x 1.0x 0.8x
Working capital / Revenue 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Tax rate 24.0% 29.0% 34.5% 22.0% 25.0% 23.0% 20.0% 20.0%

Implied multiples
N+1 EV / EBITDA 11.6x 9.9x 7.7x 11.5x 7.2x 13.7x 13.8x 8.5x
Terminal EV / EBITDA 10.4x 9.3x 7.8x 10.7x 6.8x 12.0x 11.9x 9.7x

Target Price 1,800p EUR80 EUR13 670p EUR10 5,330p EUR42 4,660p
Date Oct-19 Oct-19 Oct-19 Oct-19 Oct-19 Oct-19 Oct-19 Oct-19

Source: Exane BNP Paribas estimates

Sum-of-the-parts valuation only relevant for Whitbread

The relevance of sum-of-the-parts approaches to value European listed hotels has
diminished given the respective separation strategies at IHG and Accor:
– IHG has gone from owning around 200 hotels worth c.£4bn of property value in
2003 to just 8 hotels worth c.£300m today (with one hotel accounting for c.£130m), or
c.2% of Enterprise Value, so that we see no material upside / downside if and when
these assets are recycled.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 69

 – In February 2018, Accor agreed to sell 55% of its property business, AccorInvest,
to a group of sovereign and institutional investors for a Gross Asset Value (pre-debt
increase) of EUR4.4bn. In July 2018 Accor sold down a further 7% of AccorInvest for
EUR 250m, implying a valuation of c. EUR 1.3bn for Accor’s remaining 35.2% stake,
which we capture in our DCF as a revalued investment.

The exercise continues to hold relevance at Whitbread however, who own and
manage c. 2/3 of their hotel portfolio. Whitbread management have estimated the gross
property value of their freehold estate to be in the region of GBP4.2bn to GBP5.1bn,
This valuation has been derived by third party appraisers, based on an analysis of over
a third of the portfolio, and assuming 4.5% to 5.5% yields.

Factoring in a +GBP230m increase to Premier Inn’s current rental charge and an

associated reduction in group EBITDA, a sum-of-the parts could suggest as high as
6,080 fair value per share (or +29% upside to the shares) in a sale and lease-back
scenario.

Figure 100: Up to 29% upside… closer to 11% with a realistic discount / derating
Whitbread – Sum-of-the-parts scenarios (FY19e financials)
Current Discount to GAV Discount to GAV SOP at full GAV
+ Op Co De-rating

EBITDAR 834 834 834 834

Rent -156 -386 -386 -386
EBITDA 678 448 448 448
EV/EBITDA 9.2 7.5 9.2 9.2
Op Co EV 6,233 3,360 4,118 4,118
Prop Co 0 3,818 3,818 4,600
Net cash 2,646 2,646 2,646 2,646
Pension liability -261 -261 -261 -261
Equity Value 8,618 9,563 10,322 11,104
per share 4,717 5,234 5,649 6,077
upside 0.0% 11.0% 19.8% 28.8%

Source: Exane BNP Paribas estimates

This simplistic sum-of-the-parts assumes 1. that Whitbread can sell its entire property
portfolio at its appraised GAV, and 2. that the resulting OpCo continues to trade at the
current EV / EBITDA multiple of 9.2x. We believe neither is a realistic assumption
however, and a scenario of a sale at a discounted valuation, together with a de-rating
of the OpCo shares, leaves us with 5,230p fair value or “only” 11% upside.

Achievable yields likely lower. Whitbread has a relatively small but trackable history
of sales and leasebacks. These transactions have been achieved at attractive yields
with more recent London properties achieving a c.4% net initial yield while larger
national disposals achieved a c.5.5% net initial yield. These net initial yields are
calculated after purchaser’s cost which typically amount to c. 6.75% of the transaction
value. For a c.25 year lease this would result in the net yield being 30-40bp lower than
the gross yield, so that making those comparable we arrive at a gross yield range of c.
4% to 5.8%, broadly comparable to Whitbread’s appraisal assumptions of 4.5% to
5.5%.

However, we would still expect the portfolio to be sold at a significant discount to GAV.
In our realistic case we have assumed a c.6.0% implied gross yield or a 17% discount
to GAV (GBP3.8bn) taking into account two main factors:
– Risk of flooding the market. Potential investors in a large scale Premier Inn ProCo
would require a discount to that applied to individual assets given the supply / demand
dynamics in a multi-billion transaction and an inability to “cherry pick” properties.
Whitbread management themselves have mentioned as a caveat to their property
valuation range that “a large program would likely require higher yields”.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 70

 – Benchmarking with Secure Income REIT portfolio. Listed real estate company
Secure Income REIT owns a hotel portfolio valued at c.£480m achieving a 5.6% net
initial yield, higher than the cheapest recent Whitbread transactions. In March 2018,
Secure Income REIT acquired 59 Travelodge hotels for a gross cost of £212m
representing an even higher net initial yield of 6.1%.

Figure 101: Recent S&Ls have achieved a c.4% net initial yield
Whitbread history of Sales and Lease-backs
Announced Location Acquirer Length Hotels Cost (£m) Rooms Cost / Room Net initial Gross
(£k) yield (EBNPP)
Jan-17 London Aviva 25 1 102 339 300 <4% c. 4%
Jan-17 London M&G 25 1 103 326 316 <4% c. 4%
Jul-16 London L&G 25 1 85 389 217 4.0% 4.3%
Dec-12 UK NFU / Standard Life 25 7 51 5.30% 5.7%
Aug-11 UK Lasalle IM 25 7 54 5.50% 5.8%
Dec-09 UK M&G 25 5 37 5.50% 5.8%

Source: company press releases, press reports

Markets likely to de-rate the resulting OpCo. It would also be unrealistic, in our view,
to expect Premier Inn to add +GBP230m of rent, increasing its operating leverage, and
to still trade at the same 9.2x EV / EBITDA multiple. In a large-scale sale and lease-
back scenario, Premier Inn’s rental cover (EBITDAR / rental charge) would reduce from
over 5.3x to only 2.1x, still an acceptable level in the world of leased hotels, which we
estimate can go as low as 1.2x - 1.8x. In our realistic scenario we have assumed some
derating to 7.5x EV / EBITDA, a -15% discount to Whitbread’s long-term average of
8.8x.

Activists may think differently. Whitbread counts two activist funds on its register:
Sachem Head with a 3.4% stake (since December 2017) and Elliott Advisors with a c.
6% stake (since April 2018). Following the disposal of Costa to The Coca Cola
Company, Elliot released a statement commenting that they “look forward to continuing
to engage with [management] to maximise the value of the remaining business”. This
would suggest that Elliot believes that there is more restructuring to do. Sachem Head
have not released a statement following the disposal however we note their initial
recommendations included the sale and leaseback of the property portfolio, according
to an FT article in March.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 71

 Company
Section

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 72

LEISURE & HOTELS

NEUTRAL
ACCOR TARGET PRICE EUR42 (DOWNSIDE 5%)

What about focused and narrowed-down hospitality?

The hotelier that wanted to be more: Accor is the only company in our coverage to have not simply
Price (28 September 2018) EUR44.2
Market cap (EURbn) 12.5 dismissed the sharing economy and new distribution models as irrelevant, and gone as far as to
Free float (EURbn) 9.0
EV (EURbn) 12.8 invest in them (OneFineStay, Fastbooking). There is a risk that this unfairly distracts investors from
a solid core hospitality story, but ahead of a new strategy reveal we would stay on the sidelines.

Jaafar Mestari Attractive core hospitality exposure, with strong showing across RevPAR and pipeline
+44 (203) 430 8427 Accor offers solid growth prospects, with the highest exposure to the ongoing recovery in
Jaafar.Mestari@exanebnpparibas.com
Continental Europe (EBNPP FY19e Group RevPAR 4.0%) as well as strong, now predominantly
asset-light, development (EBNPP FY19e net room openings +4.5%). There is not as much
happening in terms of organic new launches than at competitor IHG given a recent focus on M&A,
but despite less attractive returns and no clear pipeline boost, Accor’s recent brand acquisitions
seem to be delivering broadly on track in terms of synergies.

“Augmented Hospitality” strategy to be unveiled is a risk, beware of digital downgrades

CEO Sebastien Bazin has been teasing a new evolution in Accor’s strategy “around three pillars:
[the] core business as hotel operator and franchisor, […] services linked to travel, and community
services to locals”. The negative guidance surprise at H118 results was predominantly driven by
deeper losses in the New Business division. This together with the negative market reaction around
the reports of a minority entry into the capital of Air France (now abandoned), as well as short-lived
initiatives such as the Marketplace, in our view, will warrant considerable caution around any new
targets. KPIs on the AccorLocal launch would go a long way towards addressing those concerns.

Earnings outlook, valuation, and next catalyst

Accor trades on a CY20e P/E of 20.4x (ex-cash) for 8.7% EPS growth and a 4.0% free cash flow
yield. The buyback program could accelerate with another EUR1bn targeted (not in our forecasts)
after the initial EUR350m portion conducted this year. The shares’ re-rating year-to-date reflects
the move to an asset-light model post the AccorInvest sale, but even in this context this is less
attractive than IHG on 18.0x CY20e P/E, in our view. An investor day is planned for 27 Nov 2018.

Financials 12/17 12/18e 12/19e 12/20e Valuation metrics(2) 12/17 12/18e 12/19e 12/20e
EPS, Adjusted (EUR) 1.48 1.49 1.83 1.99 P/E (x) 27.3 29.8 24.1 22.2
EPS, IBES (EUR) 1.30 1.33 1.69 1.98 Net yield (%) 2.6 2.4 2.6 2.9
Net dividend (EUR) 1.05 1.05 1.16 1.27 FCF yield (%) 6.2 1.9 3.5 4.0
EV/Sales (x) 2.9 3.8 3.4 3.1
Sales (EURm) 3,087 3,330 3,678 3,970 EV/EBITDA (x) 14.3 18.2 15.8 14.0
EBITA, Adj. (EURm) 496 559 645 718 EV/EBITA (x) 17.9 22.9 19.6 17.3
Net profit, Adj.(EURm) 427 422 513 558 EV/CE (x) 2.1 2.1 2.1 2.0
ROCE (%) 10.0 7.7 8.8 9.7
Net Debt/EBITDA, Adj. (x) 4.5 1.0 0.6 0.3
Performance(1) 1w 1m 3m 12m
Absolute (%) 2 3 5 7
Rel. Leisure & Hotels (%) 0 1 4 1
Rel. MSCI Europe (%) 2 2 4 5

Source: Exane BNPP (estimates) Thomson Reuters (consensus) (1) In listing currency with dividend reinvested (2) Yearly average price for FY ended 12/17

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 73

Figure 102: Accor - Overview
Company description Revenue and EBITDA margin progression

Accor is the sixth largest hotel chain globally, with c. 6,000 25.0%
690,000 rooms in a portfolio of managed and
franchised brands covering the entire category 5,000
20.0%
spectrum, from Luxury (Sofitel, Fairmont) to Economy
(Ibis). The group is also present in adjacent markets
4,000
such as private rentals (OneFineStay), concierge
15.0%
services (John Paul), co-working, events, and digital
solutions. 3,000

10.0%
Having delivered on the majority sale of real estate arm 2,000
AccorInvest, CEO Sebastien Bazin (appointed in 2013
from Colony Capital) is expected to unveil a new 5.0%
1,000
strategic plan dubbed "Augmented Hospitality". CFO
and Deputy CEO Jean-Jacques Morin joined the group
in 2015 from Alstom. 0 0.0%

Revenue (GBPm) EBITDA margin (%)

HotelServices revenue by region (FY17) HotelServices EBITDA by region (FY17)

South South
America NCAC America
5% 11% 2%
NCAC
13%

MEA
7%

MEA
8%

Europe
52%
Europe
AsPac 59%
21%

AsPac
22%

Room count and pipeline progression Shareholders (as of 18/9/18)

1,000 35.0% Jin Jiang

12%
900
30.0%
800 Qatar
25.0% Investment
700 Authority
10%
600
20.0%
500
15.0% Kingdom
400 Holdings
6%
300 10.0%
200
5.0%
100
Other < 5%
0 0.0% 72%

Number of rooms ('000) Pipeline as a % of rooms

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 74

 Figure 103: Accor – Summary P&L and Cash Flow
EURm, years to end December
2016 2017 2018e 2019e 2020e 2021e
RevPAR growth
Europe - 5.0% 5.2% 4.0% 3.5% 3.0%
AsPac - 5.8% 4.8% 5.0% 4.5% 4.0%
MEA - 0.8% 0.0% 2.0% 2.0% 2.0%
NCAC - 5.7% 4.2% 3.0% 2.5% 2.0%
South America - -3.4% 6.5% 6.0% 4.0% 3.0%
Group 1.1% 4.7% 4.6% 4.0% 3.5% 3.0%

Number of rooms 583,161 616,181 710,153 742,153 775,653 808,653

net room openings (excl. M&A) 5.6% 4.4% 4.9% 4.5% 4.5% 4.3%

Group Revenue 1,646 3,087 3,330 3,678 3,970 4,249

growth - - 7.9% 10.4% 7.9% 7.0%

EBITDA margin
Hotel Services - 67.8% 68.7% 68.9% 68.9% 68.9%
Services to Owners - 1.0% 1.0% 1.0% 1.0% 1.0%
New Businesses - -25.1% -22.0% -13.7% -6.5% 0.0%
Hotel Assets & Other - 16.8% 17.0% 17.0% 17.0% 17.0%
Group - 20.1% 21.1% 21.8% 22.3% 22.7%

Group EBITDA 506 622 702 801 885 965

Depreciation & Amortisation -109 -130 -143 -156 -167 -177

Associates 6 28 100 142 148 151
Net finance costs -71 -71 -60 -60 -60 -60
Tax 2 51 -90 -127 -161 -176
Minorities -31 -36 -50 -50 -50 -50
Adjusted Net Income* 303 464 459 550 595 654

Adjusted EPS 1.02 1.48 1.49 1.83 1.99 2.20

growth - 44.7% 0.3% 23.3% 8.7% 10.5%

Dividend per share 1.05 1.05 1.05 1.16 1.27 1.40

payout 102.6% 70.9% 70.7% 63.0% 63.8% 63.5%

Net Debt (incl. hybrid) 2,569 2,776 685 510 307 82

Net Debt / EBITDA 5.1x 4.5x 1.0x 0.6x 0.3x 0.1x
Net Debt (company definition) 1,682 1,889 -202 -377 -580 -805

EBITDA 506 626 702 801 885 965

Share based payments 0 0 0 0 0 0
Change in working capital -4 37 -1 -1 -1 -1
Tax (cash) -90 -74 -99 -120 -133 -145
Other 167 470 -53 114 118 121
Cash from operations 579 1,059 549 793 869 940

Capex -464 -189 -204 -225 -243 -260

Interest -71 -71 -60 -60 -60 -60
Minorities / Other 0 0 0 0 0 0
Free Cash Flow to Equity 44 799 285 508 566 620

Uses of Free Cash Flow

Acquisitions / Disposals -2,563 -182 2,801 0 0 0
Net change in debt 137 127 -6 -175 -203 -225
Dividends / Cash to Shareholders -215 -200 -707 -333 -362 -395
FX / Other 1,088 -807 -405 0 0 0
Change in cash -1,509 -263 1,969 0 0 0

Source: company data, Exane BNP Paribas estimates, * before hybrid dividend

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 75

Figure 104: Accor – DCF valuation
EURm, years to end December
Explicit Middle Final
forecasts period period
2019 2020 2021 2022 2023 2024 2028
Cost of Capital
Risk Free Rate 1.0% Revenue 3,678 3,970 4,249 4,519 4,780 5,020 5,927
Equity Risk Premium 7.0% EBIT 645 718 788 853 912 958 1,131
Beta 1.2x D&A 156 167 177 186 195 204 241
Cost of Equity 9.40% Other 0 0 0 0 0 0 0
Cost of Debt 4.0% EBITDA 801 885 965 1,039 1,107 1,162 1,372
Tax rate 20.0% Tax -127 -161 -176 -189 -202 -192 -226
Equity / EV 70.0% Capex -225 -243 -260 -277 -293 -225 -241
WACC 7.5% Working capital -1 -1 -1 -1 -1 0 0
Other 0 0 0 0 0 0 0
Middle period Free Cash Flow to Firm 447 479 528 571 611 746 905
Number of years 4
Growth 5.0%
EBITDA margin 23.2% Discount factor @ 7.5% WACC 0.93 0.86 0.80 0.75 0.70 2.32 8.73
Capex / D&A 1.1x
Working capital / Revenue 0.0%
Tax rate 20.0% Value date Dec-18 Dec-19
Discounted Cash Flow 11,731 12,169
Final period
Growth 2.0% Net Debt / Cash -685 -510
EBITDA margin 23.2% Other Liabilities -211 -211
Capex / D&A 1.0x Associates / Investments 1,467 1,467
Working capital / Revenue 0.0% Minorities -900 -900
Tax rate 20.0% Other 0 0
Equity Value 11,402 12,015

Other Number of shares 283 283

Minorities earnings x 18.0x Equity Value per share (EUR) 40 43

Implied multiples Target date Oct-19

N+1 EV / EBITDA 13.8x Target price (EUR) 42.0
N+1 EV / EBIT 17.0x
Terminal EV / EBITDA 11.9x
Terminal EV / EBIT 14.4x

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 76

LEISURE & HOTELS

OUTPERFORM
INTERCONTINENTAL HOTELS TARGET PRICE 5330p (UPSIDE 12%)

Bringing back the American dream

With an improved pipeline and three convincing brand initiatives already announced, IHG offers
Price (28 September 2018) 4,780p
Market cap (USDbn / GBPbn) 11.9 / 9.1 attractive earnings growth. Actions to develop “the owner proposition” could drive further upside. In
Free float (USDbn / GBPbn) 9.1 / 7.0
EV (USDbn / GBPbn) 13.5 / 10.4 a scenario where IHG wins share with hotel owners and accelerates openings from our base case
of 5.2% in 2020 to 6.5% beyond, we see 20% upside to our bull case valuation.

Jaafar Mestari Dynamic pipeline growth

+44 (203) 430 8427 We expect IHG’s net room openings to accelerate from 4.0% to 5.2% by 2020e, notably thanks to
Jaafar.Mestari@exanebnpparibas.com
three brand initiatives: the new “avid hotels” US Mainstream brand, the voco EMEAA Upscale
brand, and the Franchise Plus model in China. This could add up to c. +16,000 rooms (+1.2%) p.a

The route to +6.5% net room openings

After new brands, the ‘owner proposition’ is the second pillar of IHG’s strategy, and should help the
group move towards the +6.5% net room openings mark. New initiatives on that front could be
announced with FY18e results. We identify 3 key “wants” to address to accelerate signings and
reduce exits of individual hotel owners, against the backdrop of a more challenging environment for
the traditional US Midscale Franchisee model. We also suggest ways to gain traction with large
hotel REITs. See Bringing back the American dream.

Earnings outlook, valuation, and next catalyst

In a context of low single digit RevPAR growth, brand differentiation will be key to drive network
expansion. We believe IHG has the ingredients to accelerate its organic pipeline development.
This should support 10%+ EPS growth p.a. On c.18x CY20e P/E, IHG is trading broadly in line with
US peer Marriott. Our target price of 5,330p assumes no rerating. We believe valuation multiples
can expand in a scenario of accelerated net room openings beyond our 5.2% base case forecast.
On top of the c.2% dividend yield, we estimate IHG will have c.USD320m of cash headroom (c.3%
of market cap) by end 2019e at the bottom-end of its leverage target. We would expect
announcements on the “owner proposition” at FY18e results in February 2018.

Financials 12/17 12/18e 12/19e 12/20e Valuation metrics(2) 12/17 12/18e 12/19e 12/20e
EPS, Adjusted (USD) 2.43 2.95 3.14 3.46 P/E (x) 21.6 21.1 19.8 18.0
EPS, IBES (USD) 2.43 2.89 3.18 3.45 Net yield (%) 2.0 1.9 2.0 2.2
Net dividend (USD) 1.04 1.18 1.26 1.39 FCF yield (%) 3.5 2.9 3.6 4.6
EV/Sales (x) 2.9 3.1 2.8 2.5
Sales (USDm) 4,075 4,390 4,718 5,173 EV/EBITDA (x) 14.2 15.0 13.9 12.4
EBITA, Adj. (USDm) 755 817 866 945 EV/EBITA (x) 15.7 16.5 15.3 13.8
Net profit, Adj.(USDm) 472 563 600 661 EV/CE (x) 10.1 10.0 8.6 7.3
ROCE (%) 52.9 44.2 41.6 40.9
Net Debt/EBITDA, Adj. (x) 2.2 1.9 1.6 1.2
Performance(1) 1w 1m 3m 12m
Absolute (%) 1 1 2 23
Rel. Leisure & Hotels (%) 0 2 0 14
Rel. MSCI Europe (%) 2 2 0 20

Source: Exane BNPP (estimates) Thomson Reuters (consensus) (1) In listing currency with dividend reinvested (2) Yearly average price for FY ended 12/17

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 77

Figure 105: IHG - Overview
Company description Revenue and EBIT margin progression

InterContinental Hotels Group is the fourth largest hotel 3,000 50%

chain globally with c. 800,000 rooms, predominantly 45%
under Franchise and Management contracts. 2,500
40%

IHG's portfolio is concentrated around key brands 35%

2,000
InterContinental (Luxury, c. 66,000 rooms), Crowne
30%
Plaza (Upscale, c. 115,000 rooms), and Holiday Inn /
Holiday Inn Express (Midscale, c. 500,000 rooms). 1,500 25%

20%
CEO Keith Barr was appointed internally in 2017, and 1,000
has refocused the group's strategy around an ambition 15%
to deliver "industry-leading net rooms growth". CFO 10%
500
Paul Edgecliffe-Johnson joined in 2004.
5%

0 0%

Revenue (USDm) EBIT margin (%)

Revenue by division (FY17) EBIT by division (FY17)*

Greater Greater
China China
7% 6%

EMEAA
20%

EMEAA
29%

Americas
64%

Americas
74%

Room count and pipeline progression Shareholders (as at 13/9/18)

Cedar Rock
1,200 40% 8%
Boron
35% 6%
1,000
30% Blackrock
800 6%
25%

Fundsmith
600 20%
5%

15%
400 Capital
10% 5%

200
5%
Other
< 5%
0 0%
70%

Number of rooms ('000) Pipeline as a % of rooms

Source: Exane BNP Paribas estimates, *before central costs

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 78

 Figure 106: IHG - Summary P&L and Cash Flow
USDm, years to end December
2015 2016 2017 2018e 2019e 2020e
RevPAR growth
Americas 4.6% 2.1% 1.6% 2.5% 2.0% 2.0%
EMEAA 5.4% 0.9% 4.2% 3.0% 3.0% 2.5%
Greater China 0.3% 2.2% 6.0% 8.0% 6.0% 5.0%
Group 4.4% 1.8% 2.7% 3.3% 2.8% 2.5%

Number of rooms (000) 744 767 798 830 869 914

net openings 3.2% 3.1% 4.0% 4.0% 4.7% 5.2%

Group Revenue 1,803 1,676 1,741 1,872 2,069 2,298

growth -3.0% -7.0% 3.9% 7.5% 10.5% 11.0%

EBIT margin
Americas 62.5% 64.6% 63.8% 62.6% 62.4% 63.4%
EMEAA 32.4% 35.8% 37.4% 40.3% 34.6% 31.9%
Greater China 33.8% 41.1% 44.4% 47.5% 46.0% 46.8%
Group 37.7% 42.1% 43.5% 43.7% 41.8% 41.1%

Adjusted EBIT 680 706 758 817 866 945

Net finance costs -87 -87 -85 -85 -85 -85

Tax -180 -184 -200 -168 -180 -198
Minorities -2 -3 -1 -1 -1 -1
Net Income 411 432 472 563 600 661

Adjusted EPS (c) 174.9 203.8 244.6 296.2 316.0 347.8

growth 10.5% 16.5% 20.0% 21.1% 6.7% 10.1%

Dividend per share (c) 85.0 94.0 104.0 118.5 126.4 139.1
payout 48.6% 46.1% 42.5% 40.0% 40.0% 40.0%

Net debt 532 1,509 1,851 1,752 1,556 1,266

Net Debt / EBITDA 0.7x 1.8x 2.3x 2.0x 1.7x 1.2x

EBITDA 797 847 838 900 970 1,072

Share based payments 19 17 21 21 21 21
Change in working capital -10 78 -27 -22 -22 -32
Tax (cash) -109 -130 -147 -114 -132 -145
Other 4 11 24 -123 -50 0
Cash from operations 701 823 709 662 787 916

Capex -199 -207 -273 -243 -269 -287

Interest -73 -71 -75 -76 -85 -85
Minorities / Other 0 -5 -3 -3 0 0
Free Cash Flow to Equity 429 540 358 340 433 543

Uses of Free Cash Flow

Acquisitions / Disposals 795 -5 -82 -26 0 0
Net change in debt 125 253 153 -99 -197 -289
Dividends / Cash to shareholders -235 -1,704 -521 -212 -236 -254
FX / Other -71 24 54 -3 0 0
Change in cash 1,043 -892 -38 0 0 0

Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 79

Figure 107: IHG – DCF valuation
USDm, years to end December
Explicit Middle Final
forecasts period period
2019 2020 2021 2022 2023 2024 2028
Cost of Capital
Risk Free Rate 1.0% Revenue 2,069 2,298 2,421 2,556 2,701 2,842 3,374
Equity Risk Premium 7.0% EBIT 866 945 1,019 1,100 1,187 1,248 1,482
Beta 1.2x D&A 93 103 108 115 121 127 151
Cost of Equity 9.40% Other 0 0 0 0 0 0 0
Cost of Debt 4.0% EBITDA 959 1,047 1,128 1,215 1,308 1,376 1,634
Tax rate 23.0% Tax -180 -198 -215 -234 -253 -287 -341
Equity / EV 75.0% Capex -269 -287 -278 -256 -270 -190 -151
WACC 7.8% Working capital -22 -32 -21 -23 -24 0 0
Other -3 -11 0 0 0 0 0
Middle period Free Cash Flow to Firm 484 519 613 703 760 899 1,141
Number of years 4
Growth 5.2%
EBITDA margin 48.4% Discount factor @ 7.8% WACC 0.93 0.86 0.80 0.74 0.69 2.28 8.09
Capex / D&A 1.5x
Working capital / Revenue 0.0%
Tax rate 23.0% Value date Dec-18 Dec-19
Discounted Cash Flow 13,711 14,299
Final period
Growth 2.0% Net Debt / Cash -1,752 -1,556
EBITDA margin 48.4% Other Liabilities -112 -112
Capex / D&A 1.0x Associates / Investments 273 273
Working capital / Revenue 0.0% Minorities -21 -20
Tax rate 23.0% Other 0 0
Equity Value 12,099 12,885

Other Number of shares 191 191

Minorities earnings x 21.2x Equity Value per share (USDc) 6,335 6,746

Implied multiples Target date Oct-19

N+1 EV / EBITDA 13.7x Target price (p) 5,330 1.32 GBP/USD
N+1 EV / EBIT 15.1x
Terminal EV / EBITDA 12.0x
Terminal EV / EBIT 13.2x

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 80

LEISURE & HOTELS

NEUTRAL
WHITBREAD TARGET PRICE 4660p (DOWNSIDE 1%)

Capex rollout story trading right where it should be

Following the sale of Costa, Whitbread has the management and financial resources to accelerate
Price (28 September 2018) 4,717p
Market cap (GBPbn / EURbn) 8.6 / 9.7 Premier Inn. Other than valuation, we believe the positive market reaction to the sale reflects
Free float (GBPbn / EURbn) 8.2 / 9.2
EV (GBPbn / EURbn) 6.0 / 6.7 management’s commitment to focus the proceeds on cash returns and on the German expansion.

Zero like-for-like: it is all about the rollout… and it is credible

Jaafar Mestari Premier Inn continues to see flattish RevPAR trends, with an overall soft UK market and dilution
+44 (203) 430 8427 from new openings, and has managed to maintain a stable margin through recent wage and input
Jaafar.Mestari@exanebnpparibas.com
cost pressures. Our +7.0% / +7.6% EPS growth through FY20e / FY21e is therefore predominantly
driven by +5.2% / +5.0% net room openings. This looks sustainable in light of management’s track
record of de-risking the openings profile by 1. defining postcode-level micro-markets to optimise
coverage without cannibalisation, 2. adding room extensions to high performing hotels rather than
greenfield openings (as much as 25% of openings in recent years), and 3. launching brand
variations (hub by Premier Inn to address London, and a potential new budget concept tbc).

A narrow range of options for cash deployment (is what you want)
Following the sale of Costa Coffee, management is committed to returning a substantial portion of
the GBP3.8bn net proceeds to shareholders. With recent accelerated refurbishments at Premier
Inn through 2015-2017, we see no obvious opportunities for UK organic investment, and would
expect an acceleration of the Germany rollout to be a priority. Premier Inn has c. 6,000 committed
rooms in Germany, compared for example to established local player Motel One at c. 15,000.

Earnings outlook, valuation, and next catalyst

A CY20e P/E valuation of 14.4x (ex-cash) for 7.8% EPS growth and a dividend yield of 1.8% on top
screens well compared to the hotels space on 17.8x… But with zero excess Free Cash Flow, the
valuations of similar UK-centric, capex-driven rollout stories suggest less attractive upside: we
would point to Merlin on 15.8x, or to a lesser extent to TUI on 10.7x (both not covered, Bloomberg
consensus). Upside from cash deployment will be key to making the story work, in our view, and
we would await more granularity on Germany at the group’s investor day to be held “in early 2019”.

Financials 02/18 02/19e 02/20e 02/21e Valuation metrics(2) 02/18 02/19e 02/20e 02/21e
EPS, Adjusted (p) 254.0 191.4 205.2 221.2 P/E (x) 15.3 24.6 23.0 21.3
EPS, IBES (p) 259.4 265.3 283.2 299.6 Net yield (%) 2.6 1.6 1.7 1.9
Net dividend (p) 101.2 76.0 81.3 87.5 FCF yield (%) 1.4 1.0 1.5 1.4
EV/Sales (x) 2.5 2.9 2.8 2.7
Sales (GBPm) 3,295 2,077 2,209 2,362 EV/EBITDA (x) 9.6 9.4 9.2 8.6
EBITA, Adj. (GBPm) 622 481 512 549 EV/EBITA (x) 13.2 12.5 12.2 11.4
Net profit, Adj.(GBPm) 465 351 376 405 EV/CE (x) 2.0 1.5 1.4 1.3
ROCE (%) 12.3 9.6 9.1 9.2
Net Debt/EBITDA, Adj. (x) 1.0 - - -
Performance(1) 1w 1m 3m 12m
Absolute (%) 0 3 19 28
Rel. Leisure & Hotels (%) 0 4 17 19
Rel. MSCI Europe (%) 1 4 17 25

Source: Exane BNPP (estimates) Thomson Reuters (consensus) (1) In listing currency with dividend reinvested (2) Yearly average price for FY ended 02/18

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 81

Figure 108: Whitbread - Overview
Company description Revenue and EBIT margin progression

Whitbread is the owner of Premier Inn, the UK's largest 3,500 25.0%
Economy hotels chain with c. 73,000 rooms and c. 700
restaurants operated under brands such as Beefeater 3,000
20.0%
and Brewers' Fayre.
2,500
Premier Inn has started expanding into Germany, with
15.0%
new builds and acquisitions expected to give the 2,000
company a footprint of 22 hotels (c. 5,700 rooms).
Following the sale of Costa Coffee for £3.8bn, the 1,500
10.0%
group has firepower to accelerate this expansion.
1,000
CEO Alison Brittain joined in 2016 with a background in 5.0%
retail banking. CFO Nicholas Cadbury has been with 500
the group since 2012.
0 0.0%

Revenue (GBPm) EBIT margin (%)

Premier Inn revenue breakdown (FY18) Premier Inn room count by region (FY18)
Germany +
International
6%

Food &
Beverage
36%

Room
revenue
64%
UK
94%

Premier Inn UK – Room count and pipeline progression Shareholders (as at 19/9/18)
Blackrock
100,000 30.0% 5% Longview
5%
90,000
Aberdeen
25.0% 5%
80,000

70,000 MFS
20.0% 5%
60,000

50,000 15.0%

40,000
10.0%
30,000

20,000
5.0%
10,000

0 0.0%
Other < 5%
80%
Number of rooms ('000) Pipeline as a % of rooms

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 82

 Figure 109: Whitbread – Summary P&L and Cash Flow
GBPm, years to end February
2016 2017 2018 2019e 2020e 2021e

Premier Inn LFL RevPAR 2.6% -0.5% 0.3% -1.0% 0.5% 1.0%
Food & Beverage LFL 0.8% 0.3% 0.4% -1.0% 1.0% 1.0%
Premier Inn LFL (total) 3.1% 1.7% 1.5% 0.0% 1.3% 1.3%

Premier Inn UK - number of rooms 64,599 68,081 72,466 76,266 80,266 84,266
net room openings 9.2% 5.4% 6.4% 5.2% 5.2% 5.0%

Revenue
Accommodation 1,113 1,194 1,276 1,331 1,430 1,550
Food & Beverage 709 714 731 750 782 816
Premier Inn - Total 1,822 1,908 2,007 2,081 2,213 2,366
Costa & Other 1,100 1,198 1,288 -4 -4 -4
Group 2,922 3,106 3,295 2,077 2,209 2,362
growth 12.0% 6.3% 6.1% -37.0% 6.4% 6.9%

EBIT margin
Premier Inn 24.5% 24.5% 24.8% 24.8% 24.8% 24.8%
Costa 13.9% 13.1% 12.3% - - -
Group 19.5% 19.1% 18.9% 23.1% 23.2% 23.2%

Adjusted EBIT 569 592 622 481 512 549

Net finance costs -23 -27 -31 -31 -31 -31

Tax -116 -119 -117 -90 -96 -103
Minorities 3 3 1 1 1 1
Adjusted Net income* 433 449 475 361 386 415

Adjusted EPS 238.6 246.3 260.1 197.4 211.2 227.3

growth 11.7% 3.2% 5.6% -24.1% 7.0% 7.6%

Dividend per share 90.4 95.8 101.2 76.0 81.3 87.5

payout 37.9% 38.9% 38.9% 38.5% 38.5% 38.5%

Net debt 910 890 833 -2,883 -2,646 -2,612

Net debt / EBITDA 1.2x 1.1x 1.0x -4.5x -3.9x -3.6x

EBITDA 752 810 852 636 678 726

Share based payments 17 18 4 4 4 4
Change in working capital 12 35 12 -58 -4 -5
Tax (cash) -85 -87 -99 -80 -85 -92
Other -98 -115 -114 -2 -2 -2
Cash from operations 598 661 654 501 591 632

Capex -716 -610 -520 -374 -420 -472

Interest -25 -35 -34 -41 -41 -41
Minorities / Other -11 -7 0 0 0 0
Free Cash Flow to Equity -154 9 101 86 130 118

Uses of Free Cash Flow

Acquisitions / Disposals 0 207 97 3,800 -225 0
Net change in debt 361 -50 2 85 237 34
Dividends / Cash to shareholders -152 -162 -172 -171 -142 -152
FX / Other 1 2 0 0 0 0
Change in cash 55 6 28 3,800 0 0
Source: company data, Exane BNP Paribas estimates, *company definition which excludes pension finance
costs

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 83

Figure 110: Whitbread – DCF valuation
GBPm, years to end February
Explicit Middle Final
forecasts period period
2020 2021 2022 2023 2024 2025 2029
Cost of Capital
Risk Free Rate 1.0% Revenue 2,209 2,362 2,518 2,654 2,794 2,892 3,270
Equity Risk Premium 7.0% EBIT 512 549 586 619 653 676 764
Beta 1.3x D&A 166 177 189 199 210 217 245
Cost of Equity 10.10% Other 0 0 0 0 0 0 0
Cost of Debt 4.0% EBITDA 678 726 775 818 863 893 1,010
Tax rate 20.0% Tax -96 -103 -111 -118 -124 -135 -153
Equity / EV 80.0% Capex -420 -472 -453 -451 -447 -386 -196
WACC 8.7% Working capital -4 -5 -5 -4 -4 0 0
Other 0 0 0 0 0 0 0
Middle period Free Cash Flow to Firm 158 146 206 246 287 372 661
Number of years 4
Growth 3.5%
EBITDA margin 30.9% Discount factor @ 8.7% WACC 0.92 0.85 0.78 0.72 0.66 2.07 6.45
Capex / D&A 1.8x
Working capital / Revenue 0.0%
Tax rate 20.0% Value date Feb-19 Feb-20
Discounted Cash Flow 5,825 6,175
Final period
Growth 2.0% Net Debt / Cash 2,883 2,646
EBITDA margin 30.9% Other Liabilities -261 -261
Capex / D&A 0.8x Associates / Investments 0 0
Working capital / Revenue 0.0% Minorities 0 0
Tax rate 20.0% Other 0 0
Equity Value 8,447 8,560

Other Number of shares 183 183

Minorities earnings x 0.0x Equity Value per share (p) 4,624 4,685

Implied multiples Target date Oct-19

N+1 EV / EBITDA 8.5x Target price (p) 4,660
N+1 EV / EBIT 11.3x
Terminal EV / EBITDA 9.7x
Terminal EV / EBIT 12.9x

Source: Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 84

 Appendix

Appendix 1 - Brand portfolios - US listed Hotels

Figure 111: US listed Hotels – Brand portfolios by category
(% of room count)
Marriott Hyatt Hilton Choice Wyndham

Luxury JW Marriott 3% Park Hyatt 4% Waldorf Astoria 1% - -

3% of US rooms The Ritz-Carlton 3% Miraval 0% Conrad 1%
W Hotels 1% Grand Hyatt 16% Canopy by Hilton 0%
The Luxury Collection 2% Andaz 3%
St. Regis 1%

Upscale Marriott Hotels 17% Hyatt Regency 46% Hilton 25% Cambria 1% Wyndham 3%
37% of US rooms Sheraton 13% Hyatt 2% DoubleTree 15% Ascend Collection 4% Wyndham Grand 2%
Westin 7% Hyatt Place 20% Embassy Suites 7% Dolce 1%
Courtyard 14% Hyatt House 6% Other 1% Other 1%
Residence Inn 8% Other 4%
Other 11%

Midscale Fairfield Inn & Suites 7% - Hilton Garden Inn 13% Comfort Inn 24% TRYP 2%
39% of US rooms SpringHill Suites 4% Hampton by Hilton 28% Comfort Suites 9% Ramada 14%
Four Points 4% Tru by Hilton 0% Quality Inn 30% Baymont 5%
TownePlace Suites 3% Homewood Suites 6% Clarion 8% La Quinta 8%
Aloft 2% Home2 Suites 2% Sleep Inn 6% Other 9%
Other 3% MainStay Suites 1%

Economy - - - Econo Lodge 10% Super 8 22%

21% of US rooms Suburban 1% Days Inn 17%
Rodeway Inn 7% Howard Johnson 5%
Travelodge 4%
Other 7%

Source: company data, Exane BNP Paribas estimates

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 85

 Appendix 2 - The Airbnb (back) story
The foundation
In 2007, art graduates Brian Chesky and Joe Gebbia were struggling to pay rent in San
Francisco. They decided to rent an air mattress in their apartment to conference
attendees, calling the service “Air Bed and Breakfast”. The entrepreneurs raised $30k
in the summer of 2008 by selling cereal boxes branded “Obama O’s” and “Cap’n
McCain’s” for $40 a box at convention parties. The participation in Y Combinator
introduced the business to more formal guidance and funding after which growth took
off and the business exploded.

Becoming a top 5 accommodation provider

Airbnb’s initial strategy for growth was targeting US conventions and the spike in hotel
prices that accompany such events. The difficulty was often finding the supply of hosts
with the concept of welcoming a stranger into your own home still a tricky one for hosts
and investors to comprehend.

On the supply side, Airbnb found a relatively untapped pool of potential hosts on the
classified advertisement website Craiglist which they began targeting in 2009. Coupled
with this was the revelation by the CEOs while on a trip meeting hosts in New York that
the photos uploaded to the site were not doing the properties or the experience justice.
With a simple wide lensed camera, the CEOs became photographers and drove a
dramatic uplift in bookings.

The platform then entered a period of hyper-drive as the concept benefitted from
network effects, with the rise of social media / blogging embracing this new platform
which lets you stay in a treehouse or a castle. The business is today truly global with
listings in c.200 countries and offering properties for all kinds of travellers, from
backpackers, to businessmen to A-list celebrities. In 2017, we estimate Airbnb entered
the top 5 accommodation providers by nights booked with >200m while still growing at
>50%.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 86

 Investment case, valuation and risks

Accor (Neutral, Target Price EUR42)

Investment case
Ahead of the group’s strategy reveal around the theme of “Augmented Hospitality”,
we see a balanced risk reward with strong core hotels business well placed to benefit
from the ongoing European recovery, balanced by a risk of “digital downgrades” and
negative sentiment around further investments in non-core initiatives in adjacent
markets such as home rentals and the recently-launched “community services”.

Valuation methodology
Our DCF-derived October 2019 price target is EUR42. We use a WACC of 7.5% with a
beta of 1.2x reflecting inherent cyclicality. We assume medium-term growth of 5.0%,
flat EBITDA margins at 23.2%, and perpetual growth of 2.0% beyond our explicit
forecasts. We also model capex fading down to 1.0x depreciation. We value the
remaining 35.2% stake in AccorInvest at EUR1,265m, the valuation implied by the
most recent 7% stake sale for EUR250m. Of the total EUR1,350m targeted buybacks,
we model only the first EUR350m 2018 portion and retain the rest in cash.

Risks
To the upside:
Stronger than expected recovery in France and Continental Europe, turnaround of the
New Business losses, benefit from AccorInvest becoming an independently financed
entity through refurbishments and new room openings.

To the downside:
Weaker than expected recovery in France and Continental Europe, further downgrades
from opex investments in the digital offer, potential impact on pipeline momentum from
lack of recent organic brand launches.

Intercontinental Hotels (Outperform, Target Price 5330p)

Investment case
With an improved pipeline and three convincing brand initiatives already announced,
IHG offers attractive earnings growth on our base case: an acceleration from 4.0% to
5.2% net room openings by 2020e. There is solid visibility on this with the new “avid
hotels” US Mainstream brand (EBNPP +8,000 rooms p.a) and voco EMEAA Upscale
brand (+4,000), as well as the Franchise Plus model in China (+4,000). But there is
more to come with further initiatives to “evolve owner proposition” still to be announced
under the ongoing $125m opex investment plan, and we expect IHG to articulate more
explicit initiatives targeting individual owners as well as large REITs.

Valuation methodology
Our DCF-derived October 2019 price target is 5,330p. We use a WACC of 7.8% with a
beta of 1.2x reflecting inherent cyclicality. We assume medium-term growth of 5.2%,
flat EBITDA margins at 48.4%, and perpetual growth of 2.0% beyond our explicit
forecasts. We also model capex fading down to 1.0x depreciation.

Risks
To the upside:
A faster than expected acceleration to 6% net room openings p.a., improved
momentum with large REITs in particular in the Upscale category, a reacceleration in
US demand.

To the downside:
A sharper deceleration in US demand, a failure for recent launch avid to gain traction in
signings post the initial “champagne effect”, payback on the $125m cost savings
reinvestment plan coming in below expectations.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 87

 Whitbread (Neutral, Target Price 4660p)
Investment case
Whitbread, now entirely centred on Premier Inn, is a consistent “zero like-for-like”,
capex-driven rollout story. Management has a proven track record of derisking the
ambitious UK rollout plans through micro-market analysis, room extensions, and new
brand launches. We await more granularity on the use of the Costa disposal proceeds
to accelerate the expansion into Germany.

Valuation methodology
Our DCF-derived October 2019 price target is 4,660p. We use a WACC of 8.7% with a
beta of 1.3x reflecting the more pronounced cyclicality of owned and leased property.
We assume medium-term growth of 3.5%, flat EBITDA margins at 30.9%, and
perpetual growth of 2.0% beyond our explicit forecasts. We also model capex fading
down to 0.8x depreciation. We retain all of the planned Costa proceeds as cash.

Risks
To the upside:
Fast deployment of the Costa sale proceeds into accretive portfolio acquisitions, an
improvement in the UK supply picture helping RevPAR, a material reduction in central
costs under the new leaner group structure.

To the downside:
Slow deployment of the Costa sale proceeds, further softening in the UK demand on
the back of supply or demand shocks, inability to defend Premier Inn margins in a
context of rising wages and input costs.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 88

DISCLOSURE APPENDIX

Analyst Certification
We, Saarika Ashoka, Jaafar Mestari, Georgios Pilakoutas, (authors of or contributors to the report) hereby certify that all of the views expressed in this report accurately
reflect our personal view(s) about the company or companies and securities discussed in this report. No part of our compensation was, is, or will be, directly, or indirectly,
related to the specific recommendations or views expressed in this research report.

Non-US Research Analyst Disclosure

The research analysts named below were involved in preparing this research report. Research analysts at Exane Limited and Exane SA are not associated persons of
Exane Inc. and thus are not registered or qualified in the U.S. as research analysts with the Financial Industry Regulatory Authority (FINRA) or the New York Stock
Exchange (NYSE). These non-U.S. analysts are not subject to the NASD Rule 2241 and NYSE Rule 472 restrictions on communications with a subject company, public
appearances and trading securities held by a research analyst account.

Saarika Ashoka Exane Limited Jaafar Mestari Exane Limited Georgios Pilakoutas Exane Limited

Exane SA is regulated by the Autorité des Marchés Financiers (AMF) in France, Exane Limited is authorised and regulated by the Financial Conduct Authority in the
United Kingdom, and Exane Inc. is regulated by FINRA and the U.S. Securities and Exchange Commission in the United States.

Research Analyst Compensation

The research analyst(s) responsible for the preparation of this report receive(s) compensation based upon various factors including overall firm revenues, which may
include investment banking activities.

Research Analyst-Specific Disclosures

The research analyst(s) responsible for the preparation of this report (or members of their household) may have a relationship with the companies covered by this
research report, as described in the numbered disclosures below. The table immediately below indicates which, if any, of these disclosures apply to the research
analyst(s) responsible for preparation of this research report.

Research Analyst(s) Companies Disclosures

NONE

1 – The research analyst(s) responsible for the preparation of this report or a member of his/her household has/have a financial interest in the securities of the subject
company/ies, as indicated in the previous table.
2 – The research analyst(s) responsible for the preparation of this report or a member of his/her household serve(s) as an officer, director or advisory board member of the
subject company/ies indicated in the previous table.
3 – The research analyst(s) responsible for the preparation of this report received compensation from the subject company/ies indicated in the previous table in the past
twelve months.

Exane-Specific Regulatory Disclosures

Exane SA, Exane Limited and Exane Inc. (collectively, “Exane”) may have a relationship with the companies covered by this research report, as described in the
numbered disclosures below. The table immediately below indicates which, if any, of these disclosures apply to Exane’s relationship with the subject company/ies.

Companies Disclosures
NONE

1 – Exane beneficially owns 1% or more of any class of common equity securities of the subject company/ies.
2 – Exane managed or co-managed an offering of Equity securities for the subject company/ies in the past 12 months.
3 – Exane received compensation for investment banking services from the subject company/ies in the past 12 months (the only investment banking services for Exane
with regards to the subject company/ies are those when Exane is distributor or underwriter for Equity securities offerings managed-or co-managed by BNP Paribas, when
BNP Paribas managed or co-managed an offering of Equity securities for the subject company/ies).
4 – Exane expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months.
5 – Exane SA and/or Exane Limited are/is a market maker and/or liquidity provider in the securities of the subject company/ies.
6 – Exane Inc. received compensation for products and services other than investment banking services from the subject company/ies in the past 12 months.
7 – Exane Inc. had an investment banking services client relationship with the subject company/ies in the past 12 months.
8 – Exane Inc. had a non-investment banking, securities-related client relationship with the subject company/ies in the past 12 months.
9 – Exane Inc. had a non-securities-related services relationship with the subject company/ies in the past 12 months.
10 – Exane Inc. is a market maker in the securities of the subject company/ies.
11 – Exane beneficially owns at least 0.5% long or short position of the subject company/ies.
12 – Sections of this report, with the research summary, target price and rating removed, have been presented to the subject company/ies prior to its distribution, for the
sole purpose of verifying the accuracy of factual statements.
13 – Following the presentation of sections of this report to this subject company, some conclusions were amended.

Commitment to transparency on potential conflicts of interest: BNP Paribas

While BNP Paribas (“BNPP”) holds a material ownership interest in the various Exane entities, Exane and BNPP have entered into an agreement to maintain the
independence of Exane's research reports from BNPP. These research reports are published under the brand name “Exane BNP Paribas”. Nevertheless, for the sake of
transparency, we separately identify potential conflicts of interest with BNPP regarding the company/(ies) covered by this research document.

BNP Paribas-related disclosures

BNPP may have a relationship with the companies covered by this research report, as described in the numbered disclosures below. The table immediately below
indicates which, if any, of these disclosures apply to BNPP’s relationship with the subject company/ies.

Companies Disclosures
Accor 4; 5

1 – BNPP beneficially owns 1% or more of any class of common equity securities of the subject company/ies
2 – BNPP managed or co-managed an offering of Equity securities for the subject company/ies in the past 12 months
3 – BNPP acted as Advisor in a Public Offer involving the subject Company/ies in the past 12 months.
4 – BNPP received compensation for investment banking services from the subject company/ies in the past 12 months
5 – BNPP expects to receive or intends to seek compensation for investment banking services from the subject company/ies in the next 3 months
6 – A member of senior BNPP management is a member of the Board of the subject company
7 – BNPP beneficially owns at least 0.5% long or short position of the subject company/ies.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 89

Explanation of Research Ratings
Stock Rating
Exane’s Ratings are relative ratings defined against the performance of the MSCI Index sectors.

Outperform (O/P): The stock is expected to outperform the stock’s MSCI sector over a 12-month investment horizon.
Neutral: The stock is expected to perform in line with the performance of the stock’s MSCI sector over a 12-month investment horizon.
Underperform (U/P): The stock is expected to underperform the stock’s MSCI sector over a 12-month investment horizon.
Under review: The rating of the stock has been placed under review after significant news. Any possible change will be confirmed as soon as possible in the form of a
new broadly disseminated report
Restricted (RS): The stock is covered by Exane but there is no Rating and no Target Price because Exane is involved in an equity capital market transaction relating to
the subject company.
Not Rated (NR): The stock is covered by Exane but there is no Rating and no Target Price at this time.
Not Covered (NC): Exane does not cover this company.

Distribution of Exane BNP Paribas’ equity recommendations

As at 01/10/2018 Exane BNP Paribas covered 581 companies. The companies that, for regulatory reasons, are not accorded a rating by Exane BNP Paribas are
excluded from these statistics. For regulatory reasons, our ratings of Outperform, Neutral and Underperform correspond respectively to Buy, Hold and Sell; the underlying
signification is, however, different as our ratings are relative to the sector.

39% of the companies covered by Exane BNP Paribas were rated Outperform. During the last 12 months, Exane acted as underwriter and/or distributor for BNP
Paribas on 8% of the companies with this rating for which BNP Paribas acted as manager or co-manager in an offering of equity securities. BNP Paribas provided
investment banking services to 73% of the companies accorded this rating*.

43% of the companies covered by Exane BNP Paribas were rated Neutral. During the last 12 months, Exane acted as underwriter and/or distributor for BNP Paribas
on 5% of the companies with this rating for which BNP Paribas acted as manager or co-manager in an offering of equity securities. BNP Paribas provided investment
banking services to 73% of the companies accorded this rating*.

18% of the companies covered by Exane BNP Paribas were rated Underperform. During the last 12 months, Exane acted as underwriter and/or distributor for BNP
Paribas on 4% of the companies with this rating for which BNP Paribas acted as manager or co-manager in an offering of equity securities. BNP Paribas provided
investment banking services to 69% of the companies accorded this rating*.

* Exane is independent from BNP Paribas. Nevertheless, in order to maintain absolute transparency, we include in this category transactions carried out by BNP
Paribas independently from Exane. For the purpose of clarity, we have excluded fixed income transactions carried out by BNP Paribas.

Price and Ratings Chart

Not Available for Whitbread
Not Available for Intercontinental Hotels
Not Available for Accor

The latest company-specific disclosures, valuation methodologies and investment case risks for all other companies covered by this document are available
on http://cube.exane.com/compliance.

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 90

 ACCOR (Neutral) Price at 28 Sep. 18 / Target Price

Hotels | Leisure & Hotels - France EUR44.2 / EUR42 -5%

Company description Peer group YTD performance

Accor is the sixth largest hotel chain globally, w ith c. 690,000 rooms in a portfolio of Price YTD perform ance in EUR (%)
Stock
managed and franchised brands covering the entire category spectrum, from (28 Sep. 18) Abs. Rel. Sector
Luxury (Sofitel, Fairmont) to Economy (Ibis). The group is also present in adjacent
Whitbread (=) p 4,717 19.9 19
markets such as private rentals (OneFineStay), concierge services (John Paul), co-
Compass Group (+) p 1,706 9.0 8
w orking, events, and digital solutions.
Having delivered on the majority sale of real estate arm AccorInvest, CEO Sebastien SSP Group (=) p 725 7.9 7

Bazin (appointed in 2013 from Colony Capital) is expected to unveil a new strategic NH Hotel Group (+) EUR 6.3 6.1 5

plan dubbed "Hospitality Augmented". CFO and Deputy CEO Jean-Jacques Morin Accor (=) EUR 44.2 4.5 4
joined the group in 2015 from Alstom. IHG (+) p 4,780 3.1 2

Melia H.I (=) EUR 9.6 (15.2) (16)

Sodexo (-) EUR 91.3 (16.9) (17)

Europcar (+) EUR 8.1 (19.7) (20)

Management Elior (=) EUR 13.3 (21.2) (22)

Sébastien Bazin, Chairman & CEO Parques Reun. (=) EUR 11.5 (21.4) (22)

Sven Boinet, Deputy CEO Autogrill (+) EUR 8.8 (22.4) (23)

Jean-Jacques Morin, Deputy CEO & CFO Pierre & Vac. (=) EUR 28.1 (38.8) (39)

Ownership structure Sector calendar

Jin Jiang 12.3% 04 Oct. 18 Parques Reun.: EGM (12:00 CET)
Qatar Investment Authority 10.2% 05 Oct. 18 Parques Reun.: EGM (12:00 CET)
Kingdom Holdings 5.7% 11 Oct. 18 Pierre & Vac.: Q4 Turnover 2017/18
Other Shareholders 71.8% GVC Holdings PL: Q3 2018 Sales (08:00 CET)
18 Oct. 18 Accor: Q3 2018 Sales (17:40 CET)
19 Oct. 18 IHG: Q3 Trading Statement 2018 (08:00 CET)
23 Oct. 18 Whitbread: Interim Results 2018/19 (08:00 CET)
2017 Revenue by region 25 Oct. 18 Expedia: Q3 2018 Results
26 Oct. 18 Kindred Group P: Q3 2018 Results (07:30 CET)
05 Nov. 18 Dufry: Q3 2018 Results
08 Nov. 18 Sodexo: FY 2018 Results (07:30 CET)
5%
Europcar: Q3 2018 Results (18:00 CET)
8%
52% Europe 14 Nov. 18 William Hill: H2 Trading Statement 2018 (08:00 CET)
20 Nov. 18 Com pass Group: FY 2018 Preliminary Results (08:00 CET)
13% 22% Asia Pacific
21 Nov. 18 SSP Group: FY 2018 Preliminary Results (08:00 CET)
13% North & Central America 22 Nov. 18 Pierre & Vac.: FY 2018 Results (07:00 CET)
52%
29 Nov. 18 Parques Reun.: FY 2018 Results
8% Middle East & Africa 04 Dec. 18 Elior: FY 2018 Results
22% 5% South America 17 Jan. 19 Whitbread: Q3 Trading Statement 2018/19
22 Jan. 19 Sodexo: AGM
14 Mar. 19 Dufry: FY 2018 Results

2017 EBITDA by region

2%
7%

59% Europe
11%

21% Asia Pacific

11% North & Central America

59%
21% 7% Middle East & Africa

2% South America

Analyst
Jaafar Mestari +44 (203) 430 8427
Jaafar.Mestari@exanebnpparibas.com

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 91

Price at 28 Sep. 18 / 12m Target Price
EUR44.2 / EUR42 -5% ACCOR (Neutral)
Reuters / Bloomberg: ACCP.PA / AC FP Analyst: Jaafar Mestari +44 (203) 430 8427 Hotels | Leisure & Hotels - France
Com pany Highlights EURm
60.0
Enterprise value 12,790
Market capitalisation 12,461 50.0
Free float 8,972
Target Price
3m average volume 33 40.0

Perform ance (*) 1m 3m 12m

Absolute 3% 5% 7% 30.0
Rel. Sector 1% 4% 1%
Rel. MSCI Europe 2% 4% 5%
12m Hi/Lo (EUR) : 48.6 -9% / 40.8 +8%
20.0
CAGR 1994/2018 2018/2020
EPS restated (**) 6% 16% 15.1
CFPS 1% 33% Price 11.8*CFPS Relative to MS CI Europ e
Price (yearly avg from Dec. 07 to Dec. 17) 40.3 27.2 20.8 26.3 26.8 24.9 29.1 36.0 44.9 36.0 40.5 44.2 44.2 44.2
PER SHARE DATA (EUR) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e De c. 20e
No of shares year end, basic, (m) 339.555 219.895 225.458 226.838 227.251 227.277 228.053 231.836 235.352 284.768 290.122 281.789 281.789 281.789
Avg no of shares, diluted, excl. treasury stocks (m) 361.652 222.077 226.703 226.822 227.928 227.300 228.600 237.176 235.989 259.925 288.291 284.124 279.958 279.958
EPS reported, Gaap 2.56 1.81 (1.18) 15.94 0.12 (2.63) 0.56 0.97 0.88 0.88 1.41 0.60 1.84 2.00
EPS company definition 1.81 (1.18) 15.94 0.12 (2.63) 0.56 0.97 0.88 0.88 1.40 0.60 1.83 1.99
EPS restated, fully diluted 1.80 1.69 0.45 1.08 1.73 1.36 1.37 1.57 1.64 1.02 1.48 1.49 1.83 1.99
% change 45.2% (6.3%) (73.6%) 141.4% 60.7% (21.2%) 0.4% 14.9% 4.3% (37.5%) 44.7% 0.3% 23.3% 8.7%
Book value (BVPS) (a) 10.9 20.1 18.4 16.1 15.6 12.1 11.1 15.8 16.0 19.9 18.9 17.7 18.5 19.3
Net dividend 1.08 1.65 1.05 0.62 1.15 0.76 0.80 0.95 0.95 1.05 1.05 1.05 1.16 1.27
STOCKMARKET RATIOS Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
P / E (P/ EPS restated) 22.3x 16.1x 46.7x 24.5x 15.5x 18.3x 21.3x 22.9x 27.4x 35.2x 27.3x 29.8x 24.1x 22.2x
P / E relative to MSCI Europe 202% 146% 300% 196% 131% 135% 127% 131% 180% 198% 175% 207% 183% 182%
P / CF 13.6x 7.2x 8.7x 12.5x 9.7x 10.6x 17.9x 15.4x 15.9x 22.0x 13.8x 31.0x 19.5x 17.4x
FCF yield 3.2% (1.6%) (9.5%) 1.1% 2.1% (2.7%) 0.5% 2.5% 2.2% 0.1% 6.2% 1.9% 3.5% 4.0%
P / BVPS 3.71x 1.35x 1.13x 1.64x 1.72x 2.05x 2.61x 2.29x 2.81x 1.81x 2.14x 2.50x 2.40x 2.29x
Net yield 2.7% 6.1% 5.0% 2.4% 4.3% 3.0% 2.7% 2.6% 2.1% 2.9% 2.6% 2.4% 2.6% 2.9%
Payout 59.7% 97.7% NS 57.6% 66.5% 55.8% 58.6% 60.5% 57.9% 102.6% 70.9% 70.7% 63.0% 63.8%
EV / Sales 1.69x 1.01x 1.10x 1.15x 1.13x 1.08x 1.29x 1.51x 1.85x 3.69x 2.88x 3.84x 3.43x 3.13x
EV / Restated EBITDA 9.9x 7.0x 9.1x 7.7x 7.3x 7.2x 8.2x 8.9x 10.5x 12.0x 14.3x 18.2x 15.8x 14.0x
EV / Restated EBITA 14.1x 12.1x 25.5x 15.3x 12.2x 11.6x 13.3x 13.7x 15.5x 15.3x 17.9x 22.9x 19.6x 17.3x
EV / NOPAT 19.1x 17.6x 35.7x 21.3x 19.9x 16.7x 18.2x 19.7x 20.0x 21.0x 21.4x 27.4x 23.4x 20.7x
EV / OpFCF 17.2x 83.8x NS 20.3x 16.0x NS 28.3x 20.2x 21.8x 31.8x 9.6x 35.1x 22.0x 19.4x
EV / Capital employed (incl. gross goodw ill) 3.9x 1.3x 1.1x 1.4x 1.7x 2.0x 2.5x 2.4x 3.2x 1.4x 2.1x 2.1x 2.1x 2.0x
ENTERPRISE VALUE (EURm ) 13,736 6,876 6,028 6,812 6,272 6,085 7,123 8,260 10,341 6,072 8,879 12,790 12,615 12,411
Market cap 13,894 6,010 4,636 5,947 6,096 5,667 6,623 8,294 10,518 9,335 11,631 12,461 12,461 12,461
+ Adjusted net debt 204 749 1,321 730 226 421 231 159 (195) 2,569 2,776 685 510 307
+ Other liabilities and commitments 118 131 177 128 101 307 353 305 305 283 209 211 211 211
+ Revalued minority interests 230 384 319 487 398 472 566 483 629 441 723 900 900 900
- Revalued investments 710 399 425 480 549 783 650 981 917 6,556 6,460 1,467 1,467 1,467
P & L HIGHLIGHTS (EURm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
Sales 8,122 6,776 5,490 5,948 5,569 5,649 5,536 5,454 5,581 1,646 3,087 3,330 3,678 3,970
Restated EBITDA (b) 1,390 984 665 880 856 850 865 923 986 506 622 702 801 885
Depreciation (419) (415) (429) (434) (341) (325) (329) (321) (320) (109) (126) (143) (156) (167)
Restated EBITA (b) (**) 971 569 236 446 515 526 536 602 666 397 496 559 645 718
Reported operating profit (loss) 971 569 236 446 515 526 536 602 666 307 413 410 787 866
Net f inancial income (charges) (92) (23) (78) (134) (92) (75) (92) (52) (71) (117) (54) (64) (60) (60)
Af filiates 28 20 (3) 22 5 17 2 28 10
Other 239 26 (364) 3,668 (212) (908) (186) (159) (198)
Tax (234) (177) (44) (392) (166) (143) (121) (175) (136) 2 51 (90) (127) (161)
Minorities (29) (14) (10) (10) (23) (15) (13) (17) (27) (31) (36) (50) (50) (50)
Net attributable prof it reported 883 401 (263) 3,600 27 (599) 126 227 244 161 374 206 550 595
Net attributable profit restated (c) 644 375 101 244 394 309 312 372 386 266 427 422 513 558
CASH FLOW HIGHLIGHTS (EURm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
EBITDA (reported) 1,390 984 665 880 856 850 865 923 986 432 542 553 943 1,033
EBITDA adjustm ent (b) 0 0 0 0 0 0 0 0 0 74 80 150 (142) (148)
Other items 66 75 81 (121) 69 (93) (259) (152) (47) 153 452 (133) 0 0
Change in WCR 388 (80) (45) 198 5 (158) 133 103 72 (4) 37 (1) (1) (1)
Operating cash flow 1,844 979 701 957 930 599 739 874 1,011 655 1,110 568 799 883
Capex (1,046) (897) (1,022) (621) (539) (567) (487) (465) (537) (464) (189) (204) (225) (243)
Operating free cash flow (OpFCF) 798 82 (321) 336 391 32 252 409 474 191 921 364 574 640
Net f inancial items + tax paid (344) (185) (152) (263) (255) (197) (219) (190) (226) (184) (159) (116) (103) (111)
Free cash flow 454 (103) (473) 73 136 (165) 33 219 248 7 762 248 471 529
Net f inancial investments & acquisitions 1,017 (77) 346 556 349 492 334 (982) 257 (2,563) (182) 2,801 0 0
Other (36) 408 (218) 167 163 (256) 0 39 8 (876) (650) 0 0 0
Capital increase (decrease) (490) (54) 169 44 11 3 12 993 52 1,733 26 (365) 0 0
Dividends paid (680) (719) (396) (249) (155) (269) (189) (197) (211) (178) (163) (305) (296) (325)
Increase (decrease) in net financial debt (265) 545 572 (591) (504) 195 (190) (72) (354) 1,877 207 (2,380) (175) (203)
Cash flow , group share 1,064 843 540 477 633 534 372 556 666 425 843 405 636 710
BALANCE SHEET HIGHLIGHTS (EURm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
Net operating assets 6,133 6,214 6,287 5,888 4,875 3,852 3,499 4,141 4,028 4,459 4,464 6,369 6,438 6,515
WCR (2,599) (920) (678) (1,079) (1,084) (793) (665) (750) (808) (337) (383) (382) (381) (379)
Restated capital em ployed, incl. gross goodw ill 3,534 5,294 5,609 4,809 3,791 3,059 2,834 3,391 3,220 4,206 4,145 6,051 6,122 6,199
Shareholders' f unds, group share 3,691 4,411 4,156 3,650 3,537 2,759 2,539 3,654 3,762 5,658 5,485 4,985 5,202 5,435
Minorities 61 282 286 299 231 230 217 213 225 267 341 391 441 491
Provisions/ Other liabilities 288 251 271 610 346 432 497 346 345 2,059 2,157 2,273 2,130 1,982
Net f inancial debt (cash) 204 749 1,321 730 226 421 231 159 (195) 1,682 1,889 (491) (666) (869)
FINANCIAL RATIOS (%) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e De c. 20e
Sales (% change) 6.8% (16.6%) (19.0%) 8.3% (6.4%) 1.4% (2.0%) (1.5%) 2.3% (70.5%) 87.5% 7.9% 10.4% 7.9%
Organic sales grow th 6.5% 6.1% 2.8% 7.1% 5.2% 2.7% 2.7% 3.8% 3.0% 6.5% 7.9% 9.6% 8.4% 7.6%
Restated EBITA (% change) (**) 19.5% (41.4%) (58.5%) 89.0% 15.5% 2.1% 2.0% 12.2% 10.6% (40.4%) 24.9% 12.8% 15.3% 11.3%
Restated attributable net profit (% change) (**) 47.5% (41.8%) (73.1%) 141.6% 61.5% (21.5%) 0.9% 19.2% 3.7% (31.1%) 60.5% (1.2%) 21.5% 8.7%
Personnel costs / Sales 35.7% 41.2% 40.4% 37.5% 37.5% 36.8% 36.0% 35.6% 35.6% 43.9% 26.2% 27.7% 27.5% 27.3%
Restated EBITDA margin 17.1% 14.5% 12.1% 14.8% 15.4% 15.1% 15.6% 16.9% 17.7% 30.7% 20.1% 21.1% 21.8% 22.3%
Restated EBITA margin 12.0% 8.4% 4.3% 7.5% 9.2% 9.3% 9.7% 11.0% 11.9% 24.1% 16.1% 16.8% 17.5% 18.1%
Tax rate 25.8% 31.3% 28.4% NC 38.8% 30.6% 27.1% 30.3% 22.5% NC NC 26.0% 17.5% 20.0%
Net margin 8.3% 5.7% 2.0% 4.3% 7.5% 5.7% 5.9% 7.1% 7.4% 18.0% 15.0% 14.2% 15.3% 15.3%
Capex / Sales 12.9% 13.2% 18.6% 10.4% 9.7% 10.0% 8.8% 8.5% 9.6% 28.2% 6.1% 6.1% 6.1% 6.1%
OpFCF / Sales 9.8% 1.2% (5.8%) 5.7% 7.0% 0.6% 4.5% 7.5% 8.5% 11.6% 29.8% 10.9% 15.6% 16.1%
WCR / Sales (32.0%) (13.6%) (12.3%) (18.1%) (19.5%) (14.0%) (12.0%) (13.8%) (14.5%) (20.5%) (12.4%) (11.5%) (10.3%) (9.6%)
Capital employed (excl. gdw ./intangibles) / Sales 14.8% 53.2% 72.9% 61.5% 48.6% 34.6% 33.3% 44.1% 39.7% 13.7% 9.0% 65.6% 61.3% 58.8%
ROE 17.4% 8.5% 2.4% 6.7% 11.1% 11.2% 12.3% 10.2% 10.3% 4.7% 7.8% 8.5% 9.9% 10.3%
Gearing 5% 16% 30% 18% 6% 14% 8% 4% (5%) 43% 48% 13% 9% 5%
EBITDA / Financial charges 15.1x 42.8x 8.5x 6.6x 9.3x 10.1x 10.3x 15.9x 13.8x 7.1x 8.8x 11.7x 13.3x 14.7x
Adjusted financial debt / EBITDA 0.1x 0.8x 2.0x 0.8x 0.3x 0.5x 0.3x 0.2x NC 5.1x 4.5x 1.0x 0.6x 0.3x
ROCE, excl. gdw ./intangibles 60.1% 10.8% 4.2% 8.7% 11.7% 18.7% 21.2% 17.4% 23.3% NS NS 21.4% 23.9% 25.7%
ROCE, incl. gross goodw ill 20.4% 7.4% 3.0% 6.6% 8.3% 11.9% 13.8% 12.4% 16.0% 6.9% 10.0% 7.7% 8.8% 9.7%
WACC 8.7% 9.7% 8.7% 8.9% 9.8% 9.5% 9.0% 8.8% 8.6% 7.5% 7.5% 7.6% 7.6% 7.6%
Latest Model update: 02 Oct. 18
(a) Intangibles: EUR3,802.00m, or EUR13 per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted f or am. of intangibles f rom M&A, or f or am. of gw ill for pre IFRS year

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 92

 INTERCONTINENTAL HOTELS (Outperform) Price at 28 Sep. 18 / Target Price

Hotels | Leisure & Hotels - United Kingdom 4,780p / 5,330p +12%

Company description Peer group YTD performance

InterContinental Hotels Group is the fourth largest hotel chain globally w ith c. Price YTD perform ance in EUR (%)
Stock
800,000 rooms, predominantly under Franchise and Management contracts. (28 Sep. 18) Abs. Rel. Sector
Whitbread (=) p 4,717 19.9 19
IHG's portfolio is concentrated around key brands InterContinental (Luxury, c.
Compass Group (+) p 1,706 9.0 8
66,000 rooms), Crow ne Plaza (Upscale, c. 115,000 rooms), and Holiday Inn /
Holiday Inn Express (Midscale, c. 500,000 rooms). SSP Group (=) p 725 7.9 7

NH Hotel Group (+) EUR 6.3 6.1 5

CEO Keith Barr w as appointed internally in 2017, and has refocused the group's Accor (=) EUR 44.2 4.5 4
strategy around an ambition to deliver "industry-leading net rooms grow th". CFO IHG (+) p 4,780 3.1 2
Paul Edgecliffe-Johnson joined in 2004. Melia H.I (=) EUR 9.6 (15.2) (16)

Sodexo (-) EUR 91.3 (16.9) (17)

Europcar (+) EUR 8.1 (19.7) (20)

Elior (=) EUR 13.3 (21.2) (22)

Parques Reun. (=) EUR 11.5 (21.4) (22)

Management Autogrill (+) EUR 8.8 (22.4) (23)

Patrick Cescau, Chairman Pierre & Vac. (=) EUR 28.1 (38.8) (39)

Keith Barr, CEO

Paul Edgecliffe-Johnson, CFO

Sector calendar
04 Oct. 18 Parques Reun.: EGM (12:00 CET)
Ownership structure 05 Oct. 18 Parques Reun.: EGM (12:00 CET)
Cedar Rock 7.8% 11 Oct. 18 Pierre & Vac.: Q4 Turnover 2017/18
Boron 6.2% GVC Holdings PL: Q3 2018 Sales (08:00 CET)
Blackrock 5.9% 18 Oct. 18 Accor: Q3 2018 Sales (17:40 CET)
Fundsmith 5.4% 19 Oct. 18 IHG: Q3 Trading Statement 2018 (08:00 CET)
Capital 5.1% 23 Oct. 18 Whitbread: Interim Results 2018/19 (08:00 CET)
Other Shareholders 69.6% 25 Oct. 18 Expedia: Q3 2018 Results
26 Oct. 18 Kindred Group P: Q3 2018 Results (07:30 CET)
05 Nov. 18 Dufry: Q3 2018 Results
08 Nov. 18 Sodexo: FY 2018 Results (07:30 CET)
2017 Sales by region Europcar: Q3 2018 Results (18:00 CET)
14 Nov. 18 William Hill: H2 Trading Statement 2018 (08:00 CET)
20 Nov. 18 Com pass Group: FY 2018 Preliminary Results (08:00 CET)
21 Nov. 18 SSP Group: FY 2018 Preliminary Results (08:00 CET)
7%
22 Nov. 18 Pierre & Vac.: FY 2018 Results (07:00 CET)
29 Nov. 18 Parques Reun.: FY 2018 Results
04 Dec. 18 Elior: FY 2018 Results
64% Americas
29% 17 Jan. 19 Whitbread: Q3 Trading Statement 2018/19
29% EMEAA 22 Jan. 19 Sodexo: AGM
14 Mar. 19 Dufry: FY 2018 Results
64%
7% Greater China

2017 EBIT by region

6%

20%
74% Americas

20% EMEA

6% Greater China

74%

Analyst
Jaafar Mestari +44 (203) 430 8427
Jaafar.Mestari@exanebnpparibas.com

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 93

Price at 28 Sep. 18 / 12m Target Price
4,780p / 5,330p +12% INTERCONTINENTAL HOTELS (Outperform)
Reuters / Bloomberg: IHG.L / IHG LN Analyst: Jaafar Mestari +44 (203) 430 8427 Hotels | Leisure & Hotels - United Kingdom
Com pany Highlights USDm / EURm
6,000.0
Enterprise value 13,489 / 11,622 Target Price
Market capitalisation 11,876 / 10,233
Free float 9,145 / 7,879 3,500.0

3m average volume 27 / 23 2,500.0

Perform ance (*) 1m 3m 12m
Absolute 1% 2% 23% 1,500.0
Rel. Sector 2% 0% 14%
Rel. MSCI Europe 2% 0% 20%
12m Hi/Lo : 4,966p -4% / 3,933p +22%
CAGR 2003/2018 2018/2020
EPS restated (**) 22% 8% 411.0
CFPS 18% 19% Price 15.2*CFPS Relative to MS CI Europ e
Price (yearly avg from Dec. 07 to Dec. 17) 1,130.6 680.5 660.8 1,050.4 1,155.9 1,472.0 1,860.3 2,259.4 2,618.3 2,926.9 4,091.3 4,780.0 4,780.0 4,780.0
PER SHARE DATA (USD) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e De c. 20e
No of shares year end, basic, (m) 295.000 285.550 287.000 289.473 290.000 268.300 269.000 236.500 236.500 197.138 189.990 190.698 190.698 190.698
Avg no of shares, diluted, excl. treasury stocks (m) 329.000 296.000 294.800 296.000 296.000 292.000 267.000 250.000 238.000 214.000 194.000 190.990 190.990 190.990
EPS reported, Gaap 1.45 0.91 0.75 1.02 1.59 1.87 1.41 1.58 5.20 2.15 2.80 2.24 2.77 3.42
EPS company definition 0.91 0.75 1.02 1.59 1.90 1.41 1.58 1.75 2.04 2.45 2.96 3.16 3.48
EPS restated, fully diluted 0.91 1.13 0.99 0.97 1.27 1.39 1.57 1.56 1.73 2.02 2.43 2.95 3.14 3.46
% change 34.3% 23.4% (11.7%) (2.7%) 31.7% 9.2% 12.6% (0.1%) 10.4% 16.9% 20.5% 21.1% 6.7% 10.1%
Book value (BVPS) (a) 0.3 (0.0) 0.5 1.0 1.9 1.1 (0.3) (3.1) 1.3 (5.9) (6.9) (5.7) (4.2) (2.1)
Net dividend 0.41 0.41 0.42 0.48 0.55 0.64 0.70 0.77 0.85 0.94 1.04 1.18 1.26 1.39
STOCKMARKET RATIOS Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
P / E (P/ EPS restated) 24.8x 11.1x 10.4x 16.8x 14.5x 16.8x 18.6x 23.8x 23.2x 19.6x 21.6x 21.1x 19.8x 18.0x
P / E relative to MSCI Europe 224% 101% 67% 134% 123% 123% 111% 135% 152% 110% 139% 147% 150% 147%
P / CF 17.7x 6.7x 8.4x 14.6x 11.1x 14.9x 13.0x 18.6x 15.0x 12.6x 15.5x 19.6x 16.5x 13.8x
FCF yield 3.5% 15.7% 9.3% 7.3% 8.0% 5.4% 5.4% 3.2% 4.5% 6.5% 3.5% 2.9% 3.6% 4.6%
P / BVPS 72.53x NC 19.85x 16.54x 9.82x 20.32x NC NC 30.62x NC NC NC NC NC
Net yield 1.8% 3.3% 4.1% 3.0% 3.0% 2.7% 2.4% 2.1% 2.1% 2.4% 2.0% 1.9% 2.0% 2.2%
Payout 44.6% 36.8% 42.3% 49.6% 43.2% 46.0% 44.7% 49.2% 49.2% 46.6% 42.7% 40.2% 40.2% 40.2%
EV / Sales 4.68x 2.49x 2.51x 3.28x 3.06x 3.71x 4.38x 5.60x 5.47x 2.51x 2.91x 3.07x 2.82x 2.51x
EV / Restated EBITDA 14.8x 7.7x 8.2x 9.7x 8.2x 9.6x 11.1x 13.8x 12.7x 12.5x 14.2x 15.0x 13.9x 12.4x
EV / Restated EBITA 18.3x 9.4x 10.7x 12.0x 9.7x 11.1x 12.5x 15.9x 14.5x 13.9x 15.7x 16.5x 15.3x 13.8x
EV / NOPAT 22.5x 12.1x 11.3x 16.2x 11.2x 11.3x 20.0x 24.3x 16.7x 19.1x 19.0x 22.5x 20.6x 17.9x
EV / OpFCF 21.8x 7.1x 11.8x 11.6x 9.5x 12.9x 14.5x 20.6x 16.3x 13.2x 20.4x 25.3x 20.5x 16.8x
EV / Capital employed (incl. gross goodw ill) 5.0x 3.3x 2.8x 4.3x 6.5x 10.6x 10.8x 14.6x 15.8x 9.6x 10.1x 10.0x 8.6x 7.3x
ENTERPRISE VALUE (USDm ) 8,666 4,717 3,859 5,332 5,409 6,810 8,334 10,400 9,870 9,815 11,841 13,489 13,291 13,000
Market cap 7,238 3,579 2,940 4,673 5,355 6,696 7,677 9,188 9,403 8,378 10,165 11,876 11,876 11,876
+ Adjusted net debt 1,659 1,273 1,082 760 538 1,074 1,153 1,533 529 1,506 1,851 1,752 1,556 1,266
+ Other liabilities and commitments 62 89 109 153 129 124 147 156 144 104 112 112 112 112
+ Revalued minority interests 9 10 10 13 15 17 37 24 46 59 22 21 20 18
- Revalued investments 302 235 282 267 628 1,100 680 501 251 232 309 273 273 273
P & L HIGHLIGHTS (USDm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
Sales 1,850 1,897 1,538 1,628 1,768 1,835 1,903 1,858 1,803 3,912 4,075 4,390 4,718 5,173
Restated EBITDA (b) 585 612 469 552 658 708 753 751 779 783 833 901 959 1,047
Depreciation (111) (110) (109) (108) (99) (94) (85) (96) (96) (75) (78) (84) (93) (103)
Restated EBITA (b) (**) 474 502 360 444 559 614 668 655 683 708 755 817 866 945
Reported operating profit (loss) 534 549 369 444 594 610 673 680 1,499 712 728 658 792 933
Net f inancial income (charges) (90) (101) (54) (62) (62) (54) (73) (80) (87) (80) (72) (76) (85) (85)
Af filiates
Other 103 (85) (86) 9
Tax (84) (101) (15) (98) (72) (11) (226) (208) (188) (173) (115) (155) (180) (198)
Minorities 0 0 (1) 0 0 (1) (2) (1) (2) (3) (1) (1) (1) (1)
Net attributable prof it reported 463 262 213 293 460 544 372 391 1,222 456 540 425 526 650
Net attributable profit restated (c) 300 333 293 286 377 406 418 391 411 432 472 563 600 661
CASH FLOW HIGHLIGHTS (USDm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
EBITDA (reported) 645 659 478 552 693 704 758 776 1,631 803 824 741 884 1,036
EBITDA adjustm ent (b) (60) (47) (9) 0 (35) 4 (5) (25) (852) (20) 9 160 74 11
Other items (24) 34 (53) (102) (20) (85) 6 (43) 36 87 46 (103) (17) 46
Change in WCR 22 123 59 106 35 33 60 43 (10) 78 (27) (22) (22) (32)
Operating cash flow 583 769 475 556 673 656 819 751 805 948 852 776 919 1,061
Capex (186) (108) (148) (95) (103) (128) (245) (246) (199) (207) (273) (243) (269) (287)
Operating free cash flow (OpFCF) 397 661 327 461 570 528 574 505 606 741 579 533 650 774
Net f inancial items + tax paid (140) (99) (52) (121) (143) (166) (159) (208) (177) (196) (218) (190) (217) (230)
Free cash flow 257 562 275 340 427 362 415 297 429 545 361 343 433 543
Net f inancial investments & acquisitions 146 83 34 131 51 (1) 296 369 788 (9) (79) (29) 0 0
Other (28) (2) (11) 6 (41) (37) 66 75 22 195 (28) 0 0 0
Capital increase (decrease) (247) (139) 11 (34) (67) (181) (322) (178) (47) (10) (3) (3) 0 0
Dividends paid (1,524) (118) (118) (121) (148) (679) (534) (943) (188) (1,698) (596) (212) (236) (254)
Increase (decrease) in net financial debt 1,396 (386) (191) (322) (222) 536 79 380 (1,004) 977 345 (99) (197) (289)
Cash flow , group share 421 547 363 329 495 456 597 499 635 669 660 607 723 862
BALANCE SHEET HIGHLIGHTS (USDm ) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e Dec. 20e
Net operating assets 2,621 2,339 2,192 2,043 1,762 1,503 1,687 1,384 1,654 1,528 1,708 1,864 2,041 2,225
WCR (887) (908) (828) (795) (928) (861) (917) (673) (1,030) (510) (532) (510) (488) (455)
Restated capital em ployed, incl. gross goodw ill 1,734 1,431 1,364 1,248 834 642 770 711 624 1,018 1,176 1,355 1,553 1,770
Shareholders' f unds, group share 92 (6) 149 284 547 308 (82) (725) 309 (1,154) (1,308) (1,095) (805) (410)
Minorities 6 7 7 7 8 9 8 8 10 8 7 5 6 7
Provisions/ Other liabilities 279 392 408 464 369 351 371 397 282 1,129 1,105 1,200 1,305 1,414
Net f inancial debt (cash) 1,659 1,273 1,082 760 538 1,074 1,153 1,533 529 1,506 1,851 1,752 1,556 1,266
FINANCIAL RATIOS (%) Dec. 07 Dec. 08 Dec. 09 Dec. 10 Dec. 11 Dec. 12 Dec. 13 Dec. 14 Dec. 15 Dec. 16 Dec. 17 Dec. 18e Dec. 19e De c. 20e
Sales (% change) 4.8% 2.5% (18.9%) 5.9% 8.6% 3.8% 3.7% (2.4%) (3.0%) 117.0% 4.2% 7.7% 7.5% 9.6%
Organic sales grow th 9.5% 110.3% (17.0%) 5.9% 6.0% 6.0% 4.0%
Restated EBITA (% change) (**) 29.2% 5.9% (28.3%) 23.3% 25.9% 9.8% 8.8% (1.9%) 4.3% 3.7% 6.6% 8.2% 6.0% 9.1%
Restated attributable net profit (% change) (**) 10.7% 11.0% (12.0%) (2.3%) 31.7% 7.7% 3.0% (6.5%) 5.1% 5.1% 9.3% 19.2% 6.7% 10.1%
Personnel costs / Sales 35.0% 33.9% 38.4% 38.4% 38.4% 38.4% 38.4% 35.4% 34.8% 15.2% 15.8% 15.8% 16.2% 16.5%
Restated EBITDA margin 31.6% 32.3% 30.5% 33.9% 37.2% 38.6% 39.6% 40.4% 43.2% 20.0% 20.4% 20.5% 20.3% 20.2%
Restated EBITA margin 25.6% 26.5% 23.4% 27.3% 31.6% 33.5% 35.1% 35.3% 37.9% 18.1% 18.5% 18.6% 18.4% 18.3%
Tax rate 18.9% 22.5% 4.8% 25.7% 13.5% 2.0% 37.7% 34.7% 13.3% 27.4% 17.5% 26.7% 25.4% 23.3%
Net margin 16.2% 17.6% 19.1% 17.6% 21.3% 22.2% 22.1% 21.1% 22.9% 11.1% 11.6% 12.8% 12.7% 12.8%
Capex / Sales 10.1% 5.7% 9.6% 5.8% 5.8% 7.0% 12.9% 13.2% 11.0% 5.3% 6.7% 5.5% 5.7% 5.6%
OpFCF / Sales 21.5% 34.8% 21.3% 28.3% 32.2% 28.8% 30.2% 27.2% 33.6% 18.9% 14.2% 12.1% 13.8% 15.0%
WCR / Sales (47.9%) (47.9%) (53.8%) (48.8%) (52.5%) (46.9%) (48.2%) (36.2%) (57.1%) (13.0%) (13.1%) (11.6%) (10.3%) (8.8%)
Capital employed (excl. gdw ./intangibles) / Sales 63.7% 52.0% 65.5% 54.7% 24.5% 10.6% 13.2% 3.7% (33.4%) (2.3%) (2.6%) 1.6% 5.7% 9.4%
ROE 326.1% NS 196.6% 100.8% 68.9% 131.8% NS NS 133.0% NS NS NS NS NS
Gearing 1693% 127300% 694% 261% 97% 339% NC NC 166% NC NC NC NC NC
EBITDA / Financial charges 6.5x 6.1x 8.7x 8.9x 10.6x 13.1x 10.3x 9.4x 9.0x 9.8x 11.6x 11.9x 11.3x 12.3x
Adjusted financial debt / EBITDA 2.8x 2.1x 2.3x 1.4x 0.8x 1.5x 1.5x 2.0x 0.7x 1.9x 2.2x 1.9x 1.6x 1.2x
ROCE, excl. gdw ./intangibles 32.6% 39.4% 34.0% 37.1% NS NS NS NS NS NS NS NS NS NS
ROCE, incl. gross goodw ill 22.2% 27.2% 25.1% 26.4% 58.0% 93.7% 54.1% 60.2% 94.9% 50.5% 52.9% 44.2% 41.6% 40.9%
WACC 8.0% 10.2% 8.8% 9.0% 9.8% 9.6% 8.6% 8.1% 8.6% 8.0% 7.8% 7.8% 7.8% 7.8%
Latest Model update: 02 Oct. 18
(a) Intangibles: USD1,283.00m, or 7p per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted f or am. of intangibles f rom M&A, or f or am. of gw ill for pre IFRS year

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 94

 WHITBREAD (Neutral) Price at 28 Sep. 18 / Target Price

Hotels | Leisure & Hotels - United Kingdom 4,717p / 4,660p -1%

Company description Peer group YTD performance

Whitbread is the ow ner of Premier Inn, the UK's largest Economy hotels chain w ith Price YTD perform ance in EUR (%)
Stock
c. 73,000 rooms ands c. 700 restaurants operated under brands such as Beefeater (28 Sep. 18) Abs. Rel. Sector
and Brew ers' Fayre.
Whitbread (=) p 4,717 19.9 19

Compass Group (+) p 1,706 9.0 8

Premier Inn has started expanding into Germany, w ith new builds and acquisitions
expected to give the company a footprint of 22 hotels (c. 5,700 rooms). Follow ing SSP Group (=) p 725 7.9 7

the sale of Costa Coffee for £3.8bn, the group has firepow er to accelerate this NH Hotel Group (+) EUR 6.3 6.1 5

expansion. Accor (=) EUR 44.2 4.5 4

IHG (+) p 4,780 3.1 2

CEO Alison Brittain joined in 2016 w ith a background in retail banking. CFO Nicholas Melia H.I (=) EUR 9.6 (15.2) (16)
Cadbury has been w ith the group since 2012. Sodexo (-) EUR 91.3 (16.9) (17)

Europcar (+) EUR 8.1 (19.7) (20)

Elior (=) EUR 13.3 (21.2) (22)

Parques Reun. (=) EUR 11.5 (21.4) (22)

Management Autogrill (+) EUR 8.8 (22.4) (23)

Adam Crozier, Chairman Pierre & Vac. (=) EUR 28.1 (38.8) (39)

Alison Brittain, CEO

Nicholas Cadbury, CFO

Sector calendar
04 Oct. 18 Parques Reun.: EGM (12:00 CET)
Ownership structure 05 Oct. 18 Parques Reun.: EGM (12:00 CET)
Blackrock 5.4% 11 Oct. 18 Pierre & Vac.: Q4 Turnover 2017/18
Longview 5.0% GVC Holdings PL: Q3 2018 Sales (08:00 CET)
Aberdeen 5.0% 18 Oct. 18 Accor: Q3 2018 Sales (17:40 CET)
MFS 4.8% 19 Oct. 18 IHG: Q3 Trading Statement 2018 (08:00 CET)
Other Shareholders 79.8% 23 Oct. 18 Whitbread: Interim Results 2018/19 (08:00 CET)
25 Oct. 18 Expedia: Q3 2018 Results
26 Oct. 18 Kindred Group P: Q3 2018 Results (07:30 CET)
05 Nov. 18 Dufry: Q3 2018 Results
2014 Sales by region 08 Nov. 18 Sodexo: FY 2018 Results (07:30 CET)
Europcar: Q3 2018 Results (18:00 CET)
14 Nov. 18 William Hill: H2 Trading Statement 2018 (08:00 CET)
20 Nov. 18 Com pass Group: FY 2018 Preliminary Results (08:00 CET)
6%
21 Nov. 18 SSP Group: FY 2018 Preliminary Results (08:00 CET)
22 Nov. 18 Pierre & Vac.: FY 2018 Results (07:00 CET)
29 Nov. 18 Parques Reun.: FY 2018 Results
04 Dec. 18 Elior: FY 2018 Results
94% UK 6% Germany & Other international 17 Jan. 19 Whitbread: Q3 Trading Statement 2018/19
22 Jan. 19 Sodexo: AGM
14 Mar. 19 Dufry: FY 2018 Results

94%

2014 Underlying operating profit by business

36%

64% Room revenue

36% Food & Beverage

64%

Analyst
Jaafar Mestari +44 (203) 430 8427
Jaafar.Mestari@exanebnpparibas.com

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 95

Price at 28 Sep. 18 / 12m Target Price
4,717p / 4,660p -1% WHITBREAD (Neutral)
Reuters / Bloom berg: WTB.L / WTB LN Analyst: Jaafar Mestari +44 (203) 430 8427 Hotels | Leisure & Hotels - United Kingdom
Com pany Highlights GBPm / EURm
6,000.0
Enterprise value 5,996 / 6,731
Market capitalisation 8,618 / 9,675 Target Price
4,000.0
Free float 8,187 / 9,191
3m average volume 20 / 23 3,000.0
Perform ance (*) 1m 3m 12m
Absolute 3% 19% 28% 2,000.0
Rel. Sector 4% 17% 19%
Rel. MSCI Europe 4% 17% 25%
12m Hi/Lo : 4,728p -0% / 3,512p +34%
1,000.0
CAGR 2005/2018 2018/2020
EPS restated (**) 10% 8% 655.5
CFPS 14% 7% Price 12.9*CFPS Relative to MS CI Europ e
Price (yearly avg from Feb. 08 to Feb. 18) 1,618.6 1,046.3 1,083.0 1,591.1 1,610.0 2,178.2 3,194.8 4,388.3 4,794.8 3,856.0 3,882.8 4,717.0 4,717.0 4,717.0
PER SHARE DATA (p) Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
No of shares year end, basic, (m) 175.700 173.800 174.093 176.200 178.000 179.200 180.700 181.100 181.700 182.300 182.700 182.700 182.700 182.700
Avg no of shares, diluted, excl. treasury stocks (m) 190.400 174.000 174.700 176.200 176.800 179.100 181.100 182.500 182.800 182.600 183.200 183.200 183.200 183.200
EPS reported, Gaap 182.98 204.81 215.66 231.39 239.72 2082.97 205.76 221.82
EPS company definition 52.83 92.43 127.16 126.42 140.32 179.02 213.67 238.64 246.27 260.14 197.37 211.23 227.30
EPS restated, fully diluted 86.50 93.22 87.86 109.82 126.13 139.14 164.11 199.73 227.41 240.58 253.97 191.37 205.20 221.22
% change 31.5% 7.8% (5.7%) 25.0% 14.9% 10.3% 17.9% 21.7% 13.9% 5.8% 5.6% (24.6%) 7.2% 7.8%
Book value (BVPS) (a) 749.7 648.9 635.9 703.9 717.3 856.3 981.5 1088.9 1322.3 1386.9 1533.9 3523.6 3651.7 3790.3
Net dividend 36.00 36.55 38.00 44.50 44.50 51.25 68.80 82.15 90.35 95.80 101.15 75.99 81.32 87.51
STOCKMARKET RATIOS Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
P / E (P/ EPS restated) 18.7x 11.2x 12.3x 14.5x 12.8x 15.7x 19.5x 22.0x 21.1x 16.0x 15.3x 24.6x 23.0x 21.3x
P / E relative to MSCI Europe 169% 102% 79% 116% 108% 115% 116% 125% 138% 90% 98% 171% 174% 175%
P / CF 18.1x 8.6x 6.5x 8.3x 9.0x 9.9x 13.9x 16.2x 15.6x 11.9x 11.7x 16.7x 15.6x 14.5x
FCF yield (5.2%) (4.3%) 8.7% 5.0% 1.0% 1.8% 2.2% (0.3%) (1.6%) 0.2% 1.4% 1.0% 1.5% 1.4%
P / BVPS 2.16x 1.61x 1.70x 2.26x 2.24x 2.54x 3.26x 4.03x 3.63x 2.78x 2.53x 1.34x 1.29x 1.24x
Net yield 2.2% 3.5% 3.5% 2.8% 2.8% 2.4% 2.2% 1.9% 1.9% 2.5% 2.6% 1.6% 1.7% 1.9%
Payout 41.6% 39.2% 43.2% 40.5% 35.3% 36.8% 41.9% 41.1% 39.7% 39.8% 39.8% 39.7% 39.6% 39.6%
EV / Sales 2.94x 1.99x 1.95x 2.33x 2.19x 2.39x 2.87x 3.45x 3.38x 2.67x 2.48x 2.89x 2.82x 2.65x
EV / Restated EBITDA 11.2x 7.5x 7.7x 9.0x 8.5x 9.6x 11.3x 13.4x 13.1x 10.2x 9.6x 9.4x 9.2x 8.6x
EV / Restated EBITA 15.5x 10.4x 10.5x 12.0x 11.3x 12.8x 15.3x 17.9x 17.4x 14.0x 13.2x 12.5x 12.2x 11.4x
EV / NOPAT 20.9x 14.9x 15.5x 17.2x 15.6x 17.2x 19.8x 22.7x 22.1x 17.7x 16.4x 15.6x 15.2x 14.3x
EV / OpFCF NS NS 11.5x 18.7x 45.1x 34.2x 29.4x 120.3x NS 60.2x 35.0x 29.0x 24.3x 24.9x
EV / Capital employed (incl. gross goodw ill) 2.0x 1.3x 1.3x 1.7x 1.5x 1.8x 2.3x 2.8x 2.6x 2.1x 2.0x 1.5x 1.4x 1.3x
ENTERPRISE VALUE (GBPm ) 3,572 2,652 2,794 3,725 3,891 4,859 6,574 8,990 9,869 8,288 8,187 5,996 6,233 6,267
Market cap 3,064 1,818 1,888 2,794 2,840 3,869 5,725 7,930 8,698 7,026 7,094 8,618 8,618 8,618
+ Adjusted net debt 426 623 513 488 504 471 392 583 910 890 833 (2,883) (2,646) (2,612)
+ Other liabilities and commitments 82 209 391 439 532 492 448 471 259 372 261 261 261 261
+ Revalued minority interests 1 2 4 14 27 10 6 2
- Revalued investments 0 0 0 0 0 0 0 0 0 0 0 0 0 0
P & L HIGHLIGHTS (GBPm ) Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
Sales 1,217 1,335 1,435 1,600 1,778 2,030 2,294 2,608 2,922 3,106 3,295 2,077 2,209 2,362
Restated EBITDA (b) 319 351 361 413 455 509 582 670 751 809 852 636 678 726
Depreciation (89) (96) (96) (101) (110) (128) (153) (166) (183) (218) (230) (156) (166) (177)
Restated EBITA (b) (**) 230 255 265 311 345 380 430 504 568 592 622 481 512 549
Reported operating profit (loss) 175 255 265 311 346 387 392 501 528 553 590 481 512 549
Net f inancial income (charges) (20) (25) (41) (36) (40) (32) (45) (37) (40) (37) (41) (41) (41) (41)
Aff iliates
Other 461 (70) 8 30 45 38 3,455
Tax (59) (69) (71) (84) (84) (92) (24) (98) (100) (100) (112) (90) (96) (103)
Minorities 1 2 1 1 1 2 5 4 4 6 2 1 1 1
Net attributable profit reported 558 92 161 223 267 304 328 370 391 422 438 3,806 376 405
Net attributable profit restated (c) 165 162 154 194 223 249 297 365 416 439 465 351 376 405
CASH FLOW HIGHLIGHTS (GBPm ) Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
EBITDA (reported) 264 351 362 417 467 521 563 668 721 802 852 636 678 726
EBITDA adjustm ent (b) 55 0 (2) (5) (12) (13) 20 2 30 7 (0) 0 0 0
Other items (89) (69) 6 (17) (81) (41) (68) (76) (80) (97) (110) 2 2 2
Change in WCR (46) (14) 7 6 20 18 15 27 12 35 12 (58) (4) (5)
Operating cash flow 184 269 375 401 394 486 530 621 683 748 754 581 676 724
Capex (283) (276) (132) (202) (308) (344) (306) (546) (716) (610) (520) (374) (420) (472)
Operating free cash flow (OpFCF) (99) (6) 243 199 86 142 224 75 (33) 138 234 207 257 251
Net f inancial items + tax paid (60) (71) (78) (58) (57) (72) (100) (100) (109) (121) (133) (121) (127) (133)
Free cash flow (159) (78) 165 141 29 70 124 (26) (142) 17 101 86 130 118
Net f inancial investments & acquisitions 929 (49) 3 (56) 57 45 (1) (20) (12) 199 96 3,800 (225) 0
Other 115 17 0 (0) (19) (9) 12 (18) (21) (35) 32 0 0 0
Capital increase (decrease) (348) (23) 4 2 4 5 6 3 4 6 5 0 0 0
Dividends paid (64) (64) (62) (62) (87) (78) (62) (131) (155) (167) (178) (171) (142) (152)
Increase (decrease) in net financial debt (473) 197 (110) (25) 16 (33) (79) 192 327 (20) (57) (3,715) 237 34
Cash flow , group share 171 212 289 337 317 396 415 493 562 592 609 518 554 595
BALANCE SHEET HIGHLIGHTS (GBPm ) Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
Net operating assets 2,229 2,420 2,463 2,624 2,787 2,964 3,117 3,527 4,089 4,248 4,477 4,350 4,829 5,124
WCR (400) (420) (374) (381) (268) (292) (267) (301) (348) (322) (409) (351) (347) (342)
Restated capital em ployed, incl. gross goodw ill 1,829 2,001 2,089 2,243 2,519 2,672 2,850 3,226 3,741 3,929 4,071 4,002 4,485 4,785
Shareholders' funds, group share 1,317 1,128 1,107 1,240 1,277 1,535 1,774 1,972 2,403 2,528 2,803 6,438 6,672 6,925
Minorities 0 1 1 2 6 11 10 6 2 (4) 0 (1) (3) (4)
Provisions/ Other liabilities 91 274 488 533 752 691 709 707 496 614 498 513 528 544
Net f inancial debt (cash) 426 623 513 488 504 471 392 583 910 890 833 (2,883) (2,646) (2,612)
FINANCIAL RATIOS (%) Feb. 08 Feb. 09 Feb. 10 Feb. 11 Feb. 12 Feb. 13 Feb. 14 Feb. 15 Feb. 16 Feb. 17 Feb. 18 Feb. 19e Feb. 20e Feb. 21e
Sales (% change) 3.7% 9.7% 7.5% 11.5% 11.2% 14.2% 13.0% 13.7% 12.0% 6.3% 6.1% (37.0%) 6.4% 6.9%
Organic sales grow th 2.6% 3.7%
Restated EBITA (% change) (**) 12.3% 10.9% 3.8% 17.6% 10.9% 10.0% 13.1% 17.2% 12.8% 4.2% 5.1% (22.8%) 6.6% 7.2%
Restated attributable net profit (% change) (**) 8.8% (1.5%) (5.4%) 26.1% 15.2% 11.7% 19.3% 22.6% 14.0% 5.7% 5.9% (24.6%) 7.2% 7.8%
Personnel costs / Sales 30.0% 29.3% 28.6% 27.4% 26.8% 26.7% 26.5% 25.6% 25.2% 25.5% 25.4% 24.2% 24.2% 24.2%
Restated EBITDA margin 26.2% 26.3% 25.1% 25.8% 25.6% 25.0% 25.4% 25.7% 25.7% 26.1% 25.9% 30.6% 30.7% 30.7%
Restated EBITA margin 18.9% 19.1% 18.5% 19.5% 19.4% 18.7% 18.7% 19.3% 19.4% 19.1% 18.9% 23.1% 23.2% 23.2%
Tax rate 25.6% 30.1% 31.8% 30.4% 27.6% 25.8% 6.8% 21.1% 20.6% 19.3% 20.4% 20.5% 20.4% 20.4%
Net margin 13.5% 12.0% 10.6% 12.0% 12.5% 12.2% 12.8% 13.8% 14.1% 14.0% 14.1% 16.8% 17.0% 17.1%
Capex / Sales 23.3% 20.7% 9.2% 12.6% 17.3% 16.9% 13.3% 20.9% 24.5% 19.6% 15.8% 18.0% 19.0% 20.0%
OpFCF / Sales (8.1%) (0.5%) 16.9% 12.5% 4.9% 7.0% 9.8% 2.9% (1.1%) 4.4% 7.1% 10.0% 11.6% 10.6%
WCR / Sales (32.8%) (31.4%) (26.1%) (23.8%) (15.1%) (14.4%) (11.6%) (11.5%) (11.9%) (10.4%) (12.4%) (16.9%) (15.7%) (14.5%)
Capital employed (excl. gdw ./intangibles) / Sales 142.0% 141.0% 135.1% 127.5% 130.1% 121.0% 114.5% 114.2% 119.2% 117.5% 114.3% 178.1% 189.3% 189.7%
ROE 12.5% 14.4% 13.9% 15.6% 17.5% 16.2% 16.8% 18.5% 17.3% 17.4% 16.6% 5.4% 5.6% 5.9%
Gearing 32% 55% 46% 39% 39% 30% 22% 29% 38% 35% 30% (45%) (40%) (38%)
EBITDA / Financial charges 16.3x 14.0x 8.8x 11.5x 18.0x 21.5x 13.1x 18.0x 18.6x 21.7x 20.6x 15.4x 16.4x 17.5x
Adjusted financial debt / EBITDA 1.3x 1.8x 1.4x 1.2x 1.1x 0.9x 0.7x 0.9x 1.2x 1.1x 1.0x NC NC NC
ROCE, excl. gdw ./intangibles 9.9% 9.5% 9.3% 10.6% 10.8% 11.5% 12.6% 13.3% 12.8% 12.8% 13.2% 10.4% 9.8% 9.8%
ROCE, incl. gross goodw ill 9.4% 8.9% 8.6% 9.7% 9.9% 10.6% 11.6% 12.3% 12.0% 11.9% 12.3% 9.6% 9.1% 9.2%
WACC 8.1% 8.4% 8.4% 8.8% 9.4% 9.3% 8.8% 8.4% 7.9% 8.0% 7.9% 8.9% 8.9% 8.9%
Latest Model update: 02 Oct. 18
(a) Intangibles: GBP300.70m, or 2p per share. (b) adjusted for capital gains/losses, impairment charges, exceptional restructuring charges, capitalized R&D, pension charge replaced by service cost
(c) adj.for capital gains losses, imp.charges, capitalized R&D, am. of intangibles from M&A, exceptional restructuring, (*) In listing currency, w ith div. reinvested, (**) also adjusted for am. of intangibles f rom M&A, or for am. of gw ill for pre IFRS year

Exane BNP Paribas Research Hotels 2 OCTOBER 2018 page 96

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