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Peninsula hotel operator presses onward to new frontiers

Hong Kong-based luxury hotel chain nails prime spots in Myanmar and beyond

The headquarters of the old Burma Railways will become the Peninsula Yangon. (Photo courtesy of Hongkong and Shanghai Hotels)

HONG KONG -- The operator of Peninsula luxury hotels is set to expand into Myanmar and Turkey, sticking with its signature formula of operating in the best of the best locations.

Thanks to this strategy, Hongkong and Shanghai Hotels has managed to keep revenue per guest room far above that of more volume-focused rivals also based here.

Repurposing history

Its latest effort, the Peninsula Yangon, will form a key part of a broader redevelopment project with a mid-February groundbreaking around Yangon Central Railways Station. The area is comparable to Tokyo's Marunouchi. The headquarters of the old Burma Railways -- which carries traces of British rule -- will be turned into a luxury hotel.

Hongkong and Shanghai Hotels, partnering with the local Yoma Strategic Holdings, will invest some $100 million. This will be the first Peninsula hotel in a newly opened-up emerging economy. It will stand as a new symbol of Myanmar's largest city, where the surge in international business travelers has outpaced the availability of hotels to stay at.

Hong Kong, with its deeply rooted Western cultural heritage from a century and a half of British rule, stands out in Asia for the feat of spawning multiple luxury hotel operators known worldwide.

Hongkong and Shanghai Hotels is among the best-known three. The other two are Shangri-La Asia, led by Chinese business magnate Robert Kuok, and Mandarin Oriental International, under the Jardine Matheson group which has its roots in the U.K.

The Yangon expansion links to the pioneering spirit, part of the company's DNA, explained a passionate Clement King Man Kwok, CEO of Hongkong and Shanghai Hotels.

It opened the Peninsula Hong Kong back in the 1920s on the tip of the still-underdeveloped Kowloon Peninsula, aiming to become "the finest hotel east of Suez."

The luxury hotel chain has grown to 10 cities in Asia, Europe and the U.S. In scale, it pales beside Shangri-La Asia's 79 hotels and Mandarin Oriental's 29.

But Hongkong and Shanghai Hotels boasts far higher revenue per guest room, which factors in occupancy rates and prices per room. The Peninsula's per-room revenue came to 3,962 Hong Kong dollars ($510) in 2015, according to the QUICK FactSet data service -- more than quadruple Shangri-La's.

Kwok credits a persistent search for the best locations and buildings in its cities.

The Peninsula Tokyo, in a prime location near the Imperial Palace and the Western-style Hibiya Park, enjoyed 9% year-on-year growth in per-room revenue in the January-June half.

The Peninsula London, on which construction will begin this summer, is close to the popular Hyde Park, Buckingham Palace and shopping streets. This location marks the culmination of a process that took more than two decades. The company was in talks with British real estate company Grosvenor since before the June 2016 vote by the U.K. to leave the European Union. Begun as a joint development, this has turned into a solo project for Hongkong and Shanghai Hotels.

In Istanbul, the company plans to set up a hotel in a Bosporus-facing port area being redeveloped.

The three new projects "will not only allow the company to break into the European region and the Southern Asian region," but also allow it to "generate sizable revenue," wrote John Wong of the Phillip Securities group here.

Pride of ownership

Hongkong and Shanghai Hotels also owns its hotel buildings, setting it apart from such Western players as Marriott International that run hotels for the property owners.

Owning means the freedom to make periodic renovations to maintain asset value and to further cultivate earnings potential by setting up shopping facilities and luxury apartments, for instance. And the company itself is majority-owned by the Kadoorie family that also owns power company CLP Holdings, helping to promote long-term thinking.

But owning buildings does erode capital efficiency, making balancing brand power and earnings potential for investors a key challenge.

Hongkong and Shanghai Hotels' return on equity averaged 4.7% for the five years through fiscal 2015, compared with Mandarin Oriental's 8.7%. Shangri-La, struggling in China, had an ROE similar to that of Hongkong and Shanghai Hotels.

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