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Check into Home Inns HMIN again

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I bought some Home Inns (HMIN) again yesterday. Not surprisingly the stock dropped after I bought it, as things usually happen that way. But my time frame is from couple months to couple years, so I am not worried. The recent weakness of the stock is expected due to the new offerings and lock up expiration. Also I heard some rumors in China (two key managers left the company to join competitors recently, according to 21st century business herald). At the same time, the competition is heating up among budget hotels, as shown in this article from Pacific Epoch.

Despite all these, I think the postives overweigh the negatives. Home Inns is the top brand in China budget hotels; the increasing business travel and leisure travel make it hard to book a room in budget hotels in China nowadays. Home Inns is looking for new ways to expand brand (I’m not talking about text message): they just launched the Home Inns credit card with the China Merchants bank (bank web site link, Home Inns web site news). 

Another thing I noticed is the insiders Neil Shen, James Liang (and his wife), Ji Qi, David Sun (CEO) and May Wu (CFO) are not selling in this filing. While we don’t solely base our investment decision on insiders’ buy/sell, this does give some reassurance about the health of the business.  

5 replies on “Check into Home Inns HMIN again”

I bought hmin a couple days ago just before the huge drop.:( Hopefully it will go back again. The fast inter-city trains should also boost the travel. The main concern is whether hmin can edge out among the competitors.

From the Q2, 2007 Conference call… You can gather of all the risks to HMIN. HMIN will probably miss its numbers again.

Currency Loss:
According to the conference call for Q2’07, HMIN management reported $116M in USD. They will convert $20-30M of that to RMB by mid-September.

This is found in the conf. call at around the 1hr.25min area in the recording.
http://english.homeinns.com/phoenix.zhtml

Since the RMB has strengthened by 1.1% in the past 4 weeks, HMIN has basically lost $1M or 3 cents EPS due to the USD weakening against the RMB. The Chinese gov’t limits the amount HMIN can convert per month.

Other risks –
1. According to May Wu, CFO of HMIN, it costs 65k RMB per room in construction/renovation cost for the hotel room. The inflation rate in China is running at 6.5%. Cost is going up.
2. Gov’t mandated costs – the Chinese gov’t has mandated employee benefit increases. That means HMIN needs to allocate more cash to employee benefit reserves.
3. Wage pressures in China is going up.
4. Lease costs for the existing and new hotels are going up. In Beijing alone, prices on lease have gone up 22% YTD. Other places show 10-20% increases also.
5. All 23 new hotels in HMIN are being opened in 2nd tier cities – Wuhan, Xi’an, Chengdu, etc… Cost to ramp up service expertise, occupancy rates, etc… are all subject to more risks.
6. Competition is keeping revpar down.
7. Occupany rate. In 1st tier cities, it’s basically 100% occupany. In 2nd tier cities, it’s around 70-75%. Currently, 23% of HMIN hotels are in the 2nd tier cities. So overall, the occupancy rate is around 94.5% (100*.77+75*.23). In the future, HMIN will have about 50% of its hotels in the 2nd tier cities. That means the occupancy rate will trend down.

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