China Galaxy Securities has released a research report stating that, influenced by continuous supply growth and macroeconomic cyclical fluctuations, the hotel industry experiences periodic mismatches between supply and demand, creating cyclicality. The consistently growing demand for leisure travel, along with increasing market concentration and chain penetration rates, provides growth momentum for leading hotel groups. Looking ahead to 2026, the firm believes the rebalancing of the hotel industry's supply and demand structure will continue. Combined with the benefits of an industry upcycle, the investment rationale focuses on leading hotel enterprises that stand to benefit from improving supply-demand dynamics, rising chain penetration, and product upgrades, capturing investment opportunities arising from the sector's improving fundamentals. The main views of China Galaxy Securities are as follows:

Research Framework: Hotel Industry Possesses Both Cyclical and Growth Characteristics The hotel industry is a classic cyclical growth sector within China's consumer market. On the supply side, driven by the development of China's commercial real estate and the asset allocation needs of resource-oriented franchisees, coupled with product structure upgrades, room volume growth proceeds alongside increasing market concentration and chain penetration rates. On the demand side, the industry is driven by both business and leisure travel needs, with business travel—which constitutes a higher proportion of chain hotel demand—being closely tied to corporate economic activity. Consequently, under the influence of sustained supply growth and macroeconomic cyclical fluctuations, periodic supply-demand mismatches create industry cycles, while the growing demand for leisure travel and increases in market concentration and chain rates provide growth drivers for leading hotel groups.

Cycle Assessment: Supply-Demand Scissors Gap Enters Convergence Phase, Business Travel Demand is Key to Potential Outperformance Unlike previous recovery cycles which followed the pattern of "Occupancy Rate (OCC) recovery → Average Daily Rate (ADR) recovery," the Revenue Per Available Room (RevPAR) recovery in 2025 is primarily driven by ADR. The firm attributes this mainly to hotel groups and owners recognizing that the return on investment (ROI) of a "volume-for-price" strategy is no longer cost-effective, as further price concessions cannot significantly boost OCC. This objectively signals that the industry has bottomed out and is stabilizing. Looking towards 2026, the firm expects the rebalancing of the hotel industry's supply and demand structure to continue. On one hand, new supply growth is slowing due to lengthening hotel investment payback periods and a marginal slowdown in office-to-hotel conversions, with room supply growth rates beginning to decelerate from the second half of 2025. Furthermore, measures against excessive competition and monopolistic practices on internet platforms are helping restore pricing power based on genuine supply and demand. On the demand side, the upward trend in leisure travel is certain. If business travel demand exceeds expectations, an industry upcycle is likely to be established.

Lower-Tier Markets Unlock Growth Potential, Refined Operations Elevate Profitability Center The current chain penetration rate in China's domestic hotel market is relatively low, showing a significant gap compared to overseas mature markets. Lower-tier markets, leveraging their scale advantage, are key to industry expansion. Leading groups are accelerating their penetration into these markets based on their brand, management, and membership advantages, indicating ample room for mid-to-long-term growth in chain penetration. Additionally, the effectiveness of strategic focus on the mid-to-high-end and luxury segments is becoming evident. The exit of foreign players and the rise of domestic consumption trends have positioned these segments as mainstream investment targets, clarifying the industry's pricing upgrade logic. Leading hotel groups are moving away from a singular focus on scale. While maintaining expansion momentum, they are concentrating on improving quality and efficiency, with a core emphasis on refined operations. By optimizing labor efficiency, deepening membership systems, and increasing the proportion of direct sales to reduce costs and enhance efficiency, groups like Huazhu and Atour are leading in profitability through their brands and asset-light models. The overall profitability center of the industry is expected to rise steadily.

Risk Warning: Risks include a slower-than-expected macroeconomic recovery, operational recovery falling short of expectations, and risks associated with franchisee management and control.