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Is Home Inns HMIN too Expensive?

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Home Inns’ (HMIN) stock traded above $40 for the first time  today Jan 3, 2007. Since its debut on Oct 26, 2006, the stock almost doubled from its first day close price (about $22.50). From traditional valuation point of view, this is a bit insane. As a stock holder I am also nervous about such a fast run. So…why don’t we do a little PE price earning ratio analysis on this one. Let’s assume it closes at $40 today. The company earned $0.12 in the first half of year 2006, 0.10 in 3rd quarter (non GAPP, exclude one time share based compensation), and let’s say it will make $0.12 for the 4th quarter, which is quite reasonable. 40 divided by (0.12+0.10+0.12), and it’s equal to 117. This is high compared to Google, or Apple. But note the company is growing at more than 100% year over year and we can expect that trend to continue for a few years.

Note: as rule of thumb (or finger), the PE ratio should not exceed the growth rate too much. Say, for a PE 15 company, we expect it grow 15% year over year.

home inns rujia shanghai century park

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Reality Check on HMIN

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# of ADRs 32,283,906/2

Price (27Dec06) $35    
Market Cap (USD) $1,129,936,710/2    Note Google Finance has incorrect number
Rev (RMB)       Q1          Q2               Q3             Q4 
2005       109,405,488 (1st half)  77,733,825   98,722,199 
2006 110,671,567 138,386,977 160,352,229 170,000,000 
YoY                                                106%          72% 

Est 2006 Rev: $73,343,136 (assume 1 USD = 7.9 CNY )

Market Cap/Sales: 7.5 (it’s not totally out of whack 🙂

Note: # of ADRs is outstanding shares expressed in ADR , note one ADR = two ordinary shares   

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Bubble in some China Stocks

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I am not good at predicting the top or bottom of stocks, so take it for what it worth…

First is the LFC, China Life Insurance, which went from 100 to 140 in a few days mainly due to the “back to China” IPO in Shanghai Stock Exchange. Note GSH and other China blue chip ADRs traded in NYSE also got a ride at the same time.

If you would argue blue chips are “safe”, here is the more speculative ones, FFHL, the little known Fuwei Film Holding from Shandong Province, went from 8.50 to 17 in a week. You could argue the stock was priced a bit low and I saw an article mentioned this. But this quick run-up of stock price reminds me of EFUT, another little known Chinese IT company.

I have neither of the above stocks. But today’s HMIN (home inns) 8% run-up after yesterday’s 6% up made me nervous: I did have positions in HMIN. I still believe this is a very good company but I decided to take some money off the table this morning. Just as you would expected (and this is one of Major’s rules): stock went up after I sold it @ 36.88, it passed 38 today.  

(29Dec06)PS, on second thought, I jumped into conclusion too fast on FFHL. I think it’s a better company than EFUT. Please read the article I mentioned and its S1 for more info.

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Checked in Home Inns Again

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I mean the stock (HMIN), not the motel because I am in the US now. I know it was a little speculative, but I think it’s ok to put 20% of my “mad money” into this even after the amazing run from $22 to as high as $34. I think there are many reasons account for this.

1) It has more than 100% year to year revenue growth; it’s opening new hotels like crazy. Initially I was a bit concerned with this kind of growth in China and I talked to a friend in 2nd tier city in China. My worry is the affordbility of RMB 180 room rate in 2nd tier or inland cities because the wages in coast cities are much higher than inland cities. It seems not a big problem. On the other hand, I think they (Rujia) got better rate for real estate and labor in those cities; in other words, I believe they can maintain the profit margin.

2) The analogy of China/US top chain hotel market share: top 10 US hotel chains have 60% US market share; currently top 10 China hotel chains have 6% of the China market share. This got many people excited about its potential growth. I noticed from Yahoo Finance that there are two articles on WSJ on this lately (although I have not read it). I heard about the following rule to spot the top of a stock: when a company (and its founders/CEO) is mentioned in all these business magzines, it may be at peak. But I think Home Inns is not there yet. Hotel is pretty boring concept in the US. Wall Street analysts just started to get excited on this.

3) From consumer point of view, I think it’s attracting people who used to stay at 3-star hotels (high end) and Zhao Dai Shuo (low end). 3-star hotels in China used to cost RMB400, but with promotion now you can get it for little more than 200. The Zhao Dai Shuo cost less than 150, but they don’t get private bathroom, free Internet…I think Home Inns got a lot business travellers from both of them.

In summary, I know I made a mistake by selling it too early, but it’s not too late to buy HMIN at its current price (32.50 to 33). Yes, from traditional valuation point of view, it’s insane to buy a stock with PE of 160 . But remember at one point, was Google a stock like that? The most important is, they need to deliver the growth as expected.

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More about Home Inns and Mindray

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Home Inns (HMIN) and Mindray (MR) both reported their Q3 earning last week. I listened to both the conference calls. HMIN obviously did better with revenue growth: RMB 160.4 m, 106.3% year over year growth. Mindray’s revenue growth was 21.6% because of the anti-corruption campaign in Chinese hospitals. I think that growth factor determined the stock PE ratio at this time, HMIN is 162, MR is 51.

Personally I think one quarter’s number could be misleading. So let’s look at the first 9 months number. Mindray revenue growth is 41.4%; Home Inns is 125% (from RMB 176 m to RMB 396 m). So once again HMIN is the winner here. The reason again is HMIN is growing like crazy these days. They opened 25 new hotels in Q3 and have 56 hotels in development. But I still have some doubts in its growth.

1) Home Inns room rate RMB 180 is not expensive in China coastal area (where it got started), it could be a bit expensive in central and western part of the China, when we consider the wage difference here.

2) Competition: it’s heating up. Besides Jinjiang Star, Motel 168, Super 8, Home Inns’s founder Ji Qi started another chain called Hanting, which is slightly expensive than Rujia (Home Inns), and targeted business travellers.

So the question is: will HMIN’s growth be sustained for a while? My bet is their brand will help them grow for a while, but like anything else in business, nothing can grow 100% forever 🙂  Continue reading More about Home Inns and Mindray