Home Inns & Hotels Management (HMIN, profile) reported Q2 FY2014 results which included net revenue of 1.6 billion RMB (within management’s earlier guided range), and net income of 110 million RMB, an improvement on an absolute and margin basis both YoY and QoQ. Second quarter results beat consensus estimates both on the top-line (1.70 billion RMB gross revenue vs. 1.50 billion RMB est.) and on earnings (3.38 RMB per share vs. 3.31 RMB per share consensus estimate). In addition to Q2 results, management provided a Q3 FY2014 revenue outlook higher than consensus, with gross revenues of 1.88 to 1.90 billion RMB, reflecting YoY growth of about +9% (+11% QoQ).
On balance, Q2 FY2014 results were relatively solid. The company saw continued gains from cost controls, and saw a rebound in operating metrics in the form of the YoY gap in like-for-like RevPAR on an improving trend.
In prepared remarks and on the Q2 call, management seemed guardedly optimistic, a sharp contrast to the tone in March (“Market conditions remain weak with no clear signs of recovery”). Management said it expected “flattish” RevPAR into 2H, but noted that there could be some positive tailwinds if occupancy was strong (leading to some pricing power, driving up ADR).
|Recent Quarterly Performance||FY2014|
|(000) RMB, except per share amounts||Q2||Q3||Q4||Q1||Q2|
|Leased-and-operated hotel profit||225,185||292,710||155,625||67,498||242,743|
|Earnings per share (GAAP, fully diluted per ADS)||1.68||2.31||0.27||0.10||2.27|
|Leased-and-operated hotel profit||27%||34%||62%||44%||8%|
|Earnings per share||n.a.||n.a.||n.a.||n.a.||35%|
|Leased-and-operated hotel profit||379%||30%||-47%||-57%||260%|
|Earnings per share||n.a.||38%||-88%||-63%||2167%|
|Leased-and-operated hotel profit margin||16%||19%||11%||5%||17%|
|Note: Leased-and-operated hotel profit reflects profit from the company's leased-and-operated locations (excluding franchised and managed)|
The company reported about 1.3 billion RMB of highly liquid cash assets on its Q2 balance sheet, up from 1.1 in Q1. Home Inns & Hotels management generated about 366 million RMB in operating cash flow during the quarter, up from 155 million RMB in Q1, but lower than the 389 million RMB in Q2 FY2013.
Management’s outlook for Q3 FY2014 included the following:
- Revenue (gross): 1.88 to 1.89 billion RMB (about +9% YoY)
When discussing the outlook for Q3 and beyond, management shared that its assumptions were for some moderate improvement in overall results, but stopped short of providing quantitative goalposts. The company had previously softened prices somewhat in order to cope with what it saw as weak economic conditions (to help occupancy rates), and noted that if it saw stronger occupancy trends, it could have some pricing power.
Home Inns & Hotels Management reported a total of 2,374 hotels in operation at the end of Q2, comprising 1,477 franchised-and-managed and 897 leased-and-operated hotels.
The hotel development pipeline comprised 472 hotels (213 contracted or under construction, 259 under due diligence), the majority of which (over 90%) were franchised-and-managed projects.
The company reported 19.7 million active individual members in its loyalty program at the end of Q2, an increase of about 38% YoY (+8% QoQ).
Sales mix: individual members booking directly through the company (either CRS or directly with hotels) contributed approximately 57% of room nights sold in Q2; corporate contracts contributed about 13% (71% in total). Room reservations through mobile channels showed strong growth, accounting for 21% of total bookings in Q2.
Note: Comparable hotel locations are those which were in operation for at least 18 months during the quarter.
|Home Inns Operating Data||FY2014|
|All hotels in operation||Q2||Q3||Q4||Q1||Q2|
|Number of locations||1,953||2,051||2,180||2,241||2,374|
|Average daily rate (RMB)||167||173||163||156||164|
|Home Inns Operating Data||FY2014|
|Number of locations||1,420||1,465||1,563||1,654||1,732|
|Average daily rate (RMB)||171||175||166||157||166|
Key Developments in Q2 FY2014
Acquisition – the company acquired Yunshang Siji, a hotel operator in Yunnan with about 30 locations, in early May. When discussing how the chain would fit in the existing brand portfolio, management noted that the deal was more about expanding locally as opposed to a broader expansionary push similar to Motel 168. Because the Yunshang Siji chain was performing relatively well, it sounded like the decision to expand the brand or not might not be made until sometime later.
Home Inns Plus format – management announced the new Home Inns Plus format at an event in May, and on the Q2 call explained that the format would fit in the “gap” between its economy (Home Inns/Motel 168) and midscale (Yitel) products. Company management expected the first Home Inns Plus location to be operational in September, with multiple locations by the end of the year.
Brand portfolio strategy – management provided a brief discussion of its greater branding strategy as well as the shift to more franchised-and-managed hotels on the Q2 call. The company has been adding brands to its portfolio in part to cater to the changing tastes of customers, who management noted are becoming more sophisticated travelers, with specific tastes and preferences. The Yitel format was created to capture an emerging segment of the market between economy and high-end travel needs. In management’s view, the need for Yitel has been growing, and the timing was right to expand the brand from 20 current locations to nearly double by the year end. Looking ahead to FY2015, management said that Yitel could again double during the year.
When discussing the change in the company’s strategy to more franchised-and-managed hotels, management suggested that the big returns from the property play (basically a rent differential gained from holding long-term leases) was largely gone, in part due to rising property prices. As a result, the shift to more franchised locations was in a response to where it saw the next opportunity in the space, namely in operating hotels (management) instead of an ownership-like role for leased-and-managed properties.
|Home Inns & Hotels Management Income Statement||FY2014|
|Business taxes, related surcharges||-99,238||-106,150||-98,490||-94,264||-104,588|
|Total revenue, net||1,502,672||1,633,010||1,511,193||1,378,194||1,594,014|
|Consumables, Food & beverage||-89,198||-89,792||-92,034||-70,338||-85,765|
|Leased-and-operated profit margin||16%||19%||11%||5%||17%|
|Personnel costs of franchised-and-managed hotels||-42,347||-54,120||-31,855||-38,549||-57,284|
|Sales and marketing||-17,322||-24,193||-47,040||-25,035||-30,703|
|General and administrative||-76,653||-86,745||-81,406||-71,157||-81,968|
|Operating profit margin||12%||14%||7%||3%||13%|
|Accelerated fee amortization from extinguishing term loan||-41,872||0||0||0||0|
|Gain/loss from equity investment||-137||84||-466||-310||189|
|Change in fair value of convertible securities||402||-57,275||-70,870||85,508||-35,016|
|Foreign exchange gain, net||25,124||8,576||13,551||-15,156||-109|
|Income tax expense||-66,101||-78,157||-46,374||-25,465||-68,410|
|Net profit margin||6%||7%||1%||6%||7%|
|Net income due common shareholders||94,751||108,003||12,853||74,865||108,166|
Revenues increased YoY mainly due to continued hotel expansion during the year (the company added a net 421 locations since Q2 FY2013), however declining RevPAR due to lower occupancy and pricing pressures were somewhat offsetting.
Leased-and-operated costs were lower as a percentage of leased-and-operated revenue, due to continued cost controls at the hotel level, but lower pre-opening costs also contributed. One of the benefits from focusing on franchised-and-managed hotels for growth is the conversion capital expenditure is borne by the property owner, not the company. As a result of revenue growth and costs controls at leased-and-operated hotels, the leased-and-operated hotel profit margin expanded YoY, and rebounded QoQ (partially due to seasonality boosting revenue).
Personnel costs for franchised-and-managed hotels were up YoY and QoQ due to the increase of franchised-and-managed locations, and were higher as a percentage of franchised-and-managed revenue both YoY and QoQ due to revenue pressures. Franchised-and-managed revenue was negatively affected by opening more, smaller locations, which resulted in lower upfront franchise fees, and to a lesser extent, pricing pressure (affecting RevPAR) also pushed the top line lower.
The company continued its sales and marketing spending, which increased on absolute and percentage of revenue terms both YoY and QoQ, mostly due to branding initiatives undertaken during Q2.
As a result of the above, operating profit increased YoY and QoQ, and operating profit margin improved also, in part due to the higher-margin contributions from franchised-and-managed locations.
The company recognized about 33 million RMB of non-operating expenses during Q2 (mainly mark-to-market losses of convertible securities), which reduced pretax profit somewhat.
Tax expense during Q2 reflected an implied rate of 38%, due in part to the non-deductible nature of some of the non-operating expenses (namely the mark-to-market loss). Despite the higher tax burden, net income was higher both on absolute and margin terms YoY and QoQ, marking the sixth consecutive improvement of margin improvement (individual quarters compared YoY).