EUR 850.00 For Business Accounts Only

Morningstar | Strong Development Growth Supports InterContinental's Strengthening Brand Intangible Advantage

We expect InterContinental Hotels Group to expand room share in the hotel industry in the next decade, driven by a favorable next-generation traveler position supported by renovated and newer brands, as well as its industry-leading loyalty program. The company currently has a mid-single-digit percentage share of global hotel rooms and midteens share of all industry pipeline rooms. We see its room growth averaging near mid-single-digit rates over the next decade, above the long-term U.S. supply growth average of 2% and in line with the firm's growth of the past few years.With 99.3% of rooms managed or franchised, InterContinental has an attractive recurring-fee business model with high returns on invested capital and significant switching costs for property owners, as managed and franchised hotels have low fixed costs and capital requirements, and contracts lasting 20-30 years have meaningful cancellation costs for owners.We expect InterContinental's intangible brand and switching cost advantage to strengthen, driven by new hotel brands, renovation of existing properties, technology integration, and a leading loyalty program, which all lead to a strong next-generation traveler position for the company. InterContinental has added several brands since 2012; it now has 16 in total. One of the latest is a midscale concept announced in June 2017, Avid, which the company sees as addressing an underserved $20 billion market with 14 million guests. Also, InterContinental has relaunched Holiday Inn (around 30% of total room base) and Holiday Inn Express (around 30% of total room base) properties in the past few years. The firm has expanded technology integration and has over 100 million loyalty members.Cyclicality and overbuilding in the industry present the main risk for shareholders. Typically, lodging recoveries last seven to nine years. We model this cycle to last through 2019 (10 years) in the United States, which we believe is reasonable considering that from 2009 through 2018, U.S. demand and supply have increased by around 30% and 10%, respectively, with supply growth roughly matching demand growth in 2019.