Asset Management case study

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Question A1: Comment on the deal originating approach adopted by Actis for 7 Day Inn

In evaluating 7 Day Inn, Actis applies a top-down approach: from a list of  investable countries, i.e. the emerging markets, as the private euity !rm focuses on investments in these countries. "hen, they narrowed down the relevant industry according to compound annual growth rate #the $A%& for the lodging industry was at '7() and prospects of future growth. *e+t, they focused on the players in the market: star-rated star-rated hotels, budget hotels and guesthouses. After assessing the growth prospects and popularity of  each type of lodging facility, is team chose budget hotels due to its high $A%& in comparison to other hotel types #/-0() and due to e+pectations that this type of hotel would ultimately dominate the market due to economies of scale. After the team had shortlisted the top seven players in the budget hotel sector, they attended conferences and arranged meetings with individual companies. comp anies. 1efore cons consultin ulting g e+p e+perts erts fro from m the $hina 2ote 2otell Asso Associatio ciation, n, is team members then stayed at these shortlisted hotels to e+perience the service being o3ered. "he ne+ ne+tt evalu evaluation ation was conducted conducted base based d on previous !nancial statements and future forecasts. "he !nal decision for recommending 7 Day Inn was taken after intensive due diligence was conducted by Deloitte and another 1ig 4our accounting !rm.  "he top-down approach focuses on the economy as a whole before breaking the inves breaking investmen tmentt oppor opportunit tunities ies down to indus industries tries,, sect sectors ors and then individual companies. companies. In reg regard ards s this, the top-d top-down own appr approach oach was aptly apt ly su suite ited d for 7 Day Inn as thi this s is a lar large ge eu euity ity investm investment ent.. $a $are reful ful cons co nsid ider erat atio ion n of ma macr croe oeco cono nomi mic c an and d po polit litic ical al fa fact ctor ors s of th the e li list st of  investable inves table countries countries allowed i to narrow narrow down on $hina due to both the currre cu rent nt co cond ndit itio ions ns an and d fu futu turre gr grow owth th pr pros ospe pect cts. s. "h "his is ap appr proa oach ch al also so enabled i to understand the prevalent trends in the industry and what impact they have on its various sectors, hence an evaluation of both the risk ri sks s an and d ret etur urns ns as asso soci ciat ated ed wi with th th the e in indu dust stry ry.. 4ur urth ther er,, an anal alys ysis is of  competitors highlighted the strengths and weaknesses of each company

 

and so did the detailed detailed due diligenc diligence e of 7 Day Inn by a 1ig 4our 4our !rm. astly, is teams approach of e+periencing the service being o3ered by 7 Day Inn allowed it to get an inside look on how the hotels are run, the possibilities of improvement and any areas it was better at in catering customer needs compared to other budget hotels. Actis deal origination approach was focused on understanding the lodging sector as clearly as possible. "his is shown by the immediate relationship they form with an former $56 of the budget lodge !rm in outh Africa.  "he relationship plays a key role in the deal as it provides Actis with information on how business is done in the sector. "his would become important later when Actis would have to prove to management of 7 days Inn that they understand understand the business. business. 4or further understanding understanding of the 7 Days Inn and its managers Actis appointed three consulting !rms #Deloit, 1ig 4our accounting !rm and 5gon 8ehnder) as advisory !rms. "he work done do ne by th thes ese e !r !rm ms wo woul uld d en enab able le Act ctis is to un unde ders rsta tand nd th the e ri risk sks s of  investing in 7 Days Inn. 9uestion A: What A: What Strategies proved to be successful  "he !rst strateg strategy y that proved to be successful was the the  "he strategies that proved to be successful was Actis emphasis on understanding what di3erentiated 7 Days Inn from other 1udget hotels which could enable Actis to get an understanding on how the business will kee eep p its its hi high gh oc occu cupa panc ncy y rate rate:: !r !rst stly ly,, 7 Da Days ys In Inn n ad adop opte ted d the the us use e of  internet which would enable the !rm to identify its customers. "his would enable Actis to focus future returns. Also the adaptation of internet would enable 7 Days Inn to interact with its customers more e;ciently. "o further 7 Days Inn as a service provider Actis team visited the hotels to get to e+perience the e;ciency provided by 7 Days Inn.  "o  "o get the management on 7 Days Inn on board with Actis investment plans, Actis engagement with a former $56 and interviews with $hina 2ote 2o tell As Asso soci ciat atio ion n pr prov oved ed to be crit critic ical al as Actis ctis le leve vera rage ged d on th the e

 

info inforrma mati tion on ac acu uir ired ed to sh show ow 7 Da Days ys In Inn n man anag agem emen entt ab abou outt th the e understanding of their business and business priorities. 9uestion A: What A: What are the areas that could have been improved Acti tis s co coul uld d ha have ve co cond nduc ucte ted d cu cust stom omer er su surv rvey eys s on wh what at cur curre rent nt an and d Ac prospective customers at budget hotels are demanding. <sing such data, i could then gener generate ate for forecast ecasts s that would incor incorpora porate te both removal removal of  unnecessary services and products and costs incurred in introducing and maintaining services that customers demand. econdly, i I th thin ink k Actis ctis co coul uld d ha have ve wa wait ited ed for for th the e cred credit it cris crisis is to pa pass ss be befo forre approaching 7 Days Inn with funding. In other words the timing could have been improved. I think they would have gotten a better price.

Whatt !er !ere e the adv advant antage ages s an and d dis disadv advant antage ages s of  9uesti 9ue stion on A=: A=:   Wha focusing on a sector  "he disadvantages of focusing on a sector: outside in>uence on the sector will not be seen until it has entered into the sector sector.. "here could have been better investment options in another sector with even lower risks that could have been compared with 7 Days Inn and 2antin Inn.  "he advantages of focusing on a sector: Actis could compar compare e !rm that bear similar risks and be able to choose a !rm with future prospects. 4ocusing on a sector also enabled Actis to leverage on the skills and e+perience they have on the chosen sector. 4ocusing on a sector means Actis had more resources for a detailed research on the sector. 9uesti 9ue stion on b': Was the budget hotel sector in China a good sector for investments good d inv invest estme ment nt can be de! de!ned ned thr throug ough h the fol follow lowing ing par parame ameter ters: s: A goo uick payback, good long long-ter -term m ret return urns, s, low risk, high gro growth wth poten potential, tial,

 

high &eturn on 5uity that is sustainable, a proven business model and economic stability. In the case of the budget hotel sector, most of these conditions were being met: a high $A%& of '7( was sustained, changing traveler trends, such suc h as the sus susta taine ined d inc incre rease ase in bot both h lei leisur sure e and bus busine iness ss dom domest estic ic travelling and the dominance of the lodging market with ?smart travelers.  "he business model employed was proven to be successful by the large number of franchises many of the companies managed to open in short periods of time. astly, compared to star-rated hotels, the budget hotels had a higher $A%&, and high occupancy rates.  @es  @es the budget 2otel industry in $hina was good investment because of  the following factors: - Demand and growth momentum: "he budget hotel industry has fully developed in the west and was pro!table but in $hina it only made /.( of total number of hotels and '.0( of total rooms and the occupancy rate was more than B0( which showed that there was a demand for the budget hotels. "he C/( growth growth of budget hotel showed that was heavy momentum behind the growth on this sector which provided big pro!t portential. - A3ordabilit A3ordability y:

the B0( occu occupancy pancy rate shows shows that cust custome omers rs were

willing to pay for the service they got in the budget hotel which provided an incentive for investment in the industry. - $hinas fast growth: "he $hinese economy had been the fastest growing economy in the world. "his meant that there was increasing number of  people moving into the middle class than anywhere in the world who could a3ord to stay in the budget hotels since they were not e+pensive and o3ered good service. In a booming economy like $hina one would e+pect to !nd a lot small businesses whose management would not be looking to stay in a 0 or = star hotel but a hotel in the middle with good service like budget hotels.

 

9uestion b: Was other information !ould you need to "no! before ma"ing a decision to invest in the budget budg et hotel industry peci! c to the bud budget get hot hotel el ind indust ustry, ry, Ac Actis tis sho should uld ac acuir uire e inf infor orma matio tion n peci!c regardi reg arding ng both e+te e+terna rnall and inter internal nal facto factors: rs: reg regard arding ing e+te e+terna rnall facto factors, rs, information on business cycles prevailing in the lodging industry must be studied, to ensure that growth prospects prospects sustainable. &eg egar ardi ding ng th the e ac actu tual al lo loca cati tion ons s of cu currren entt ho hotel tels s is al also so a ma matt tter er of  impor imp ortan tance: ce: in dev develo elopin ping g cou countr ntries ies cit cities ies and tow towns ns ar are e con contin tinuou uously sly being e+tended and hence property rates, e.g. lease, renting or purchase price,, will increase price increase in the future. "her "herefor efore, e, all over overhead head cost str structur uctures es should be observed to incorporate any drastic changes into forecasts. *e+t, *e+ t, the mar mark ket sho should uld be stu studie died d wit with h regar egards ds to com compet petiti ition on and saturation in supply. Eust as Actis is considering investing in 7 Day Inn, so are ar e oth other er com compan panies ies tha thatt see the gr grow owth th pot potent ential ial in the budget budget hot hotel el sector. 4orecasts should factor in increased competition. astly, macroeconomic parameters of the country should be considered: which business cycle is prevalent in the economy of the budget hotel and those in economies that a3ect the host country, e.g. trade partners. "here is signi!cant impact of change in economic conditions in one country on its it s tr trad adin ing g pa part rtne ners rs an and d he henc nce e th that at ca can n le lead ad to hi high gh >u >uct ctua uati tion ons s in demand, dema nd, speci speci!call !cally y in the hosp hospitalit itality y indus industry try.. 1efor 1efore e inves investing ting in the budget hotel industry, one would want to know about e+ternal factors to the industry. "hese would include government regulations. Question c1: Which !as a better investment for Actis

Fembership program

 

7 Day Inn Ability •

2antin Inn membership to run *o program s covid heide mees gr thter art prov pr grea eate

 

customer sati sa tisf sfac acti tion on an and d e+perience to e+isting customers Gossibility of   improving customer service. 2igh retention of  clients '0 #greater than ''' 2antin) arger area coverage Available to repeat clients that either •



*umber of hotels











voluntarily #leisure travelers) choose cho ose di3 di3er erent ent locations or those that are set to repeatedly use one location e.g. forr co fo conf nfer eren ence ces s and wor ork ksho hops ps #business travelers) 1et ette terr e eu uip ipp ped to ful!ll needs of  cust cu stom omer ers s that travel to multiple destinations: provide standardiHed service across regions Develop contracts with businesses for rep epea eatt bu busi sine ness ss travelers at

2igh concen con centra tratio tion n of  hotels close by.

 

discount rates. Available in maor cities. C.( #greater than 77.B( 2antin) Aggressive growth strategy strategy.. /. #roughly = rooms /. /.#r #roug oughly hly  ro room oms s per sta3 member) per sta3 member) Gossibility ower ratio which of   then translates to ine;ciency of  lower labor costs. sta3. ho ower cost hort rter er cle cleani aning ng passed on to and maintenance cust cu stom omer ers s that time of rooms. 1etter are budget attendance by conscious. sta3 to customer •

$A%&



ta3 to &oom ratio











*umber members program

of in

active %reater than 7//,/// *one loyalty Dedicated Dedica ted cli client ent base. Dont need to rely on walk-in clients

needs.





In addition to the above, 7 Days Inn has a high 51I"DA margin, shortest payback period and lowest daily average rate. After considering all the above, it can be con above, conclud cluded ed tha thatt 7 Da Day y Inn is a bet better ter inv invest estme ment nt tha than n 2antin Inn.  "he better investment target for Actis was 7 Days Inn. "his was because of lower room prices and lower cost model accompanied by 7 days Inn better management e;ciency, consistency and uality of service which created higher value for money. 7 days Inn had a higher number of hotels #'0) compared to 2antin #'''). "he higher number of hotels for 7 Days Inn may have been an indication that the !rm was not very far from slowing its growth which which had kept the !rm !rm with negative pro! pro!ts. ts. 4inally, 7

 

Days Day s Inn had ide identi nti!ed !ed its cus custom tomers ers and cou could ld uanti uantify fy the them m whi which ch increased the predictability of future retur returns ns for an investment. Question c#: What other critical information do I need to decide !hich from is better for investments $omp aris ison on of th the e tw two o co comp mpan anie ies s is es esse sent ntia ial: l: th this is is do done ne th thro roug ugh h $ompar analyHing various ratios from the !nancial statements of both companies forr at le fo leas astt

0yea 0y ears rs.. *e *e+t +t,, u ual alit itat ativ ive e in info form rmat atio ion n reg egar ardi ding ng cl clie ient nt

e+pe e+ peri rien ence ce sh shou ould ld be co coll llec ecte ted. d. In Inve vest stor or pe perrce cept ptio ion n of se serv rvic ice e be bein ing g o3ered and the brand itself is critical.  "o  "o make a well informed decision on which !rm to invest in it is critical that I get hold of both companys historical !nancial statements. "his would assist me identifying key investment signals for both companies.  "hese

investment

signals

include

iuidityJeverage of the companies.

pro!tability

of

the

companies,

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