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China IPO

The economy of China Economy Hotel

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In his annual letter to shareholders, Buffett said the “party is over”. He was referring to the insurance business, which is the cornerstone of Berkshire Hathaway.

It appears the party for the economy hotels in China is over too. You can read this Chinese article at Sina if you know Chinese. This is understandable because as the leader of this pack, Home Inns (Rujia, HMIN) got listed in the US in Nov. 2006, lots of money has been poured into this hot sector in China, notably the 7daysInn (fund by warburg pincus), Hanting (found by Home Inns founder Ji Qi, raised $85 million fund last year, about the same size of Home Inns’ IPO proceeds).

Now they are paying the price of over-investment and fierce competition thereafter. Let me quote the Chinese article:

锦江之星的这家店位于吴中路和桂林路口,这里并不是上海人气最高的地段。但在不足4公里长的吴中路周边,却挤下了莫泰、7天连锁酒店、上海优家旅店、上海东湖之旅虹锦酒店等超过8家经济型酒店,其中汉庭竟然在同一区段拥有两家店面!

English translation: JinJiang star hotel is located at intersection of WuZhong Rd. and GuiLin Rd., which is not a hot district in Shanghai. But along this less than 4km WuZhong Rd., there are more than 8 economy hotels including motel168, 7daysInn etc., and HanTing even has two hotels in this district!

Jinjiang Inn at ChangNing Rd.
(JinJiang Inn at Shanghai ChangNing Rd., March 2007, full size pic here.)

The irrational expansion of economy hotels has at least caused two problems:
1) In the cost side, the rising of rental cost, and hard-to-find experieced hotel management people;
2) The once 90% room occupancy rate is decling to 80%, 70%, 60%. This is happening in Home Inns recent acquisition Top Star hotel chain. This is actually good news for consumers (at the cost of investors).

Another example to appreciate the success of See’s Candies?

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