22 Jan – Harry Smith – Senior Investment Analyst

Having recently turned 100, there is no sign of complacency at Hilton as the company positions itself to take market share.  

Travel is a growing industry, supported by a rising middle class globally and a generation of consumers more willing to spend on experiences versus possessions. Hotelier, Hilton is likely to be a major beneficiary. Their brand will likely become increasingly appealing to independent hotel owners as Hilton wields economies of scale and lowers the cost of customer acquisition. The company has progressively moved from asset owner to a franchise model. This allows exploitation of a structural opportunity with very little capital investment.

The business 

Under the Hilton umbrella are 6,000 hotels with a combined 950,000 rooms. Of which, Hilton only owns or leases 2% of properties. The rest are under 20-30 year franchise contracts. The company has a mid-single digit share of global hotel rooms, but a 20% share of the global hotel construction pipeline. This places Hilton in a good position to take market share. The company should grow rooms by 6-7% per year. Future growth is likely to come from the Asia Pacific, shifting mix slowly away from North America.

Asset light 

Hilton has an attractive recurring-fee business model. Over the past several years, Hilton has sold off much of its owned and leased hotel portfolio, becoming predominantly asset-light. 98% of rooms now under franchise contracts.