Elan is China Lodging Group’s new economy brand to accommodate hotels that don’t fully meet the standards of its other brands in the segment.

China Lodging Group is introducing a seventh brand—Elan Hotel—to allow the company to expand its dominance in the economy hotel segment in China, executives said Tuesday during an earnings call with analysts.

Qi Ji, the company’s founder, executive chairman and CEO, said while the company’s economy HanTing Hotel and Hi Inn brands have performed well, there is a niche in the market it felt it could fill.

“HanTing has established itself as the premium brand in the economy hotel segment through consistent brand quality and with product standards strictly followed,” Qi said. “We also noticed a group of economy hotels in the market that are of decent quality; however, they don’t fit completely into the HanTing standard. They may be in a 3- or 4-tier city with large bars in the lobby, which is not in line with our brand standards.”

Qi said development of the new brand in part was in response to questions from potential franchisees.

“Franchisees have told us if we push them to change decoration it will cost them lot of (capital expenditures),” he said. “The new brand has a wider tolerance in regard to appearance. Instead of expanding the HanTing brand to bring in those hotels with a different look and feel, we would rather keep it very consistent and have another brand to meet needs of a more diversified decorating style.”

Qi said Elan will share many core standards with HanTing, including such things as property management systems, mattress and bath standards, and standards for Wi-Fi, but owners will be given more leeway in design and décor standards.

Company executives didn’t say when the new brand will debut, but they said they have a long-term goal of 1,400 Elan properties.

Jenny Zhang, CFO and chief strategy officer, told analysts the new brand will have similar franchise fees to HanTing and Hi Inn, but “that’s not the distinguishing point” for owners.

“For a prospective hotel owner, there is a tradeoff between having to spend more to convert to a HanTing Hotel, which is a reliable established brand but with higher investment in (capital expenditure),” she said. “In the second choice they can invest in core quality systems but maintain the hotel’s appearance and not convert everything to HanTing standards.”

Growth curve

Even though a sluggish Chinese economy depressed the company’s operating performance for the quarter, growth is still a priority for management.

During the second quarter, China Lodging opened 140 properties: 15 leased and operated by the company and 125 under its manachised (franchised and managed) platform. The development pipeline includes 45 leased hotels and 460 manachised properties.

At the end of the quarter, the company had 1,669 hotels comprising 179,186 rooms. More than half of the system are manachised hotels with the remainder leased or franchised.

“There is still a lot of potential for growth in China,” Qi said. “Just 20% of economy hotels in the country are branded, and the development of the HanTing and Hi Inn brands is well on track.”

Flat quarter

Operating performance during the quarter mirrored the results from the second quarter of 2013. Occupancy was nearly even at 91.2% (compared to 91.3% last year). Company executives blamed a 1% drop in average daily rate to more hotels in the portfolio in lower-tier cities.

Despite flat performance metrics, the company posted a 20.5% increase in net revenues and an 18% rise in adjusted earnings before income, taxes, depreciation and amortization.

Company executives had a positive forecast for the third quarter, calling for net revenues to increase between 20% and 22%.

As of press time, the company’s shares are down 18.2% year to date. By comparison, the R.W. Baird/STR Hotel Stock Index is up 11.7% year to date.