Mar 19, 2010 05:56 PM

SOEs Ordered to Check Out of Hotel Sector

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(Caixin Online) State-owned enterprises without primary interests in the hospitality industry have been told to get out of the hotel business.

The government-ordered reorganization may affect nearly 2,000 hotels across China run by more than 100 SOEs, and involve asset transfers valued at more than 100 billion yuan, according to one analyst estimate.

The State-owned Assets Supervision and Administration Commission (SASAC) issued the order on January 25, although details were initially withheld from the public. Divestments are set to be launched this year.

Sources close to SASAC said the move is aimed at reorganizing and integrating state-owned hotels, transferring them to companies that can manage them more professionally. Ninety percent of the affected hotels are now run by "third-tier" subsidiaries of large SOEs.

Some industry experts said they were puzzled by the order, and wonder whether government agencies have unannounced interests in the divestments. Moreover, company officials at some hotels targeted for spin-offs are putting up resistance.

"To be honest, we don't know the true intentions behind SASAC's actions," said the head of one state-owned company. "Perhaps they will set up an asset management company so that they can operate the hotels themselves."

One high-ranking SOE official warned that unless the reshuffling takes a market-based approach, operational problems may arise. For example, hotel staffers could be negatively affected by changes in wage and benefit systems.

SOEs in the property development and travel industries are being allowed to keep their hotels. These include China Poly Group, China Resources, China National Real Estate Development Group, state airlines and hospitality firms.

State-owned tourism and hotel companies such as OCT, China Travel Service (CTS) and China International Travel Service may be in the best position to profit from the changes.

On March 10, Zhang Xuewu, chairman of CTS, who is also a member of the Chinese People's Political Consultative Conference, confirmed that his company would benefit from the reorganization. CTS is one of the country's largest hotel operators, with 1.4 billion yuan in revenues last year.

The divestment is "mainly a transfer to state-owned companies that are focused on the tourism hotel industry," said one source.

Splitting Up

Separating primary and secondary businesses run by SOEs has been a government focus for more than eight years, and a top priority since 2003, when SASAC under Director Li Rongrong was given a mission to strengthen SOEs. But the effort's timetable has been pushed back repeatedly, so that to date no more than 70 percent of SASAC's goals have been achieved.

SASAC spent four years studying SOE financials, designing a plan and putting the reorganization into motion. One official expressed hope that the hotel reorganization would provide a helpful model for future divestments, including some that could be even more sensitive.

Hotel operators generally earn small profits but manage costly assets. So to accurately assess SOE hotels, the government in 2004 started checking their books by applying so-called economic value-added (EVA) tests, which subtract capital costs from after-tax operating profits to gauge true performance.

EVA tests turned up financial weaknesses, and found many hotels that reported profits were actually in the red. Later, EVA tests were used more broadly to determine which SOEs should keep hotels.
"Currently, for most of the 129 state-owned enterprises under review, hotels represent a ‘special non-primary business,'" a source said. "If these companies do not divest these hotels, they cannot pass the EVA test."

A tourism analyst at China Jianyin Investment Securities said SOEs now operate more than 2,000 hotels holding more than 100 billion yuan in assets.

An SASAC insider said the reorganization "is primarily aimed at hotels, motels and other ‘external' businesses. Internal entities such as training centers and nursing homes will not be affected."

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