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Home Inns Q1 Results

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Here are the results. I listened to Home Inns Q1 conference call (see the scripts here).

Some of the positives:

1) Revenue growth 65% Year over Year. Profit did not follow because of foreign change loss, tax expense and share based compensation. Note the foreign exchange loss won’t be one time as they continue moving the IPO money (in USD) to China (RMB), and you know these days the USD depreciates (wrt RMB) non-stop.

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2) Home Inns are expanding rapidly in 2nd tier cities. It seems analysts are a little nervous about the roommate rate and profit margin in those cities. But I think Home Inns are fine in this aspect, because although the room rate is lower in those cities, other costs such as personnel may also be lower so overall margin is protected. The good thing in 2nd tier cities is they don’t have strong competitors, as seen in Shanghai and Beijing where everybody is there.

3) Membership. They got 200,000 members at the end of 2006, 268,000 members at the end of Q1. More than 40% of bookings are from members. Members are usually loyal customers, see you can read from Wang Jianshuo’s blog (quoted below).

“I have many friends, who only stay at Rujia. The guys in Daqi.com always stay in this hotel, no matter it is one person, or a group of 20 people. It is their default choice of hotel. So I believe it may be better than other two (Disclaimer again, I never stayed in any of them).” 

On the other side (hate to say this because yours truely is both a member and a stock holder of Home Inns): whether the management admit or not, the competition of econ hotels in China is intensified. This usually translated to “price war”. While I have no doubt Home Inns (Rujia) will be the winner eventually, because of its good management and strong brand, they may lose couple battles along the way.  

Also, keep in mind, the (net) profit margin of econ hotel is about 10%. While we don’t compare apple with orange, we should realize that econ hotels is not as profitable as Crocs (CROX) or Starbucks (SBUX). Just think for a pair of Crocs ($30), you can stay at Home Inns for one night. We know the cost of hotel stay is much higher than making Crocs.

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