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Executives

Ethan Ruan – IR Manager

David Sun – Chief Executive Officer

Huiping Yan – Chief Financial Officer

Analysts

Ella Ji – Oppenheimer

Billy Ng – Bank of America Merrill Lynch

Jamie Zhou – Macquarie Research

Fawne Jiang – Brean Murray

Justin Kwok – Goldman Sachs

Home Inns & Hotels Management Inc. (HMIN) Q3 2012 Earnings Call November 13, 2012 8:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by for Home Inns Group's third quarter 2012 earnings conference call.

At this time all participants are in listen-only mode. After management's prepared remarks there will be a question-and-answer session. Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I would now like to turn the call over to your host for today's conference, Ethan Ruan, Home Inns Group's Investor Relations Manager.

Ethan Ruan

Hello, everyone, and welcome to our earnings conference call. Our third quarter 2012 earnings results were released earlier and are available on the company’s website.

With us today is David Sun, our Chief Executive Officer, and Huiping Yan, our Chief Financial Officer, who will be further discussing our performances for the past quarter. After their prepared remarks, David and Huiping will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor Provisions of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Home Inns Group does not undertake any obligation to update any forward-looking statements except as required under applicable laws.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Home Inns Group's Investor Relations website at english.homeinns.com.

I will now turn the call to our CEO, David Sun.

David Sun

Hello, everyone, and thank you for joining us today to discuss our third quarter 2012 results. We are pleased to have achieved another quarter of solid results. We experienced normal seasonality during the third quarter. The broad operating environment remained subdued and there has been no clear sign to recovery. Our core business delivered stable performance despite absence of systematic pricing increase.

Integration of Motel 168 generated another set of continued operating metrics improvement. Yitel brand of hotels are establishing healthy development framework and operating [lesson]. Our cost control and productivity initiatives at both hotel level as well as corporate level are effectively addressing rising costs and helping to protect margins. And we expect to exceed our new hotel opening targets for the full year driven by strong and mature programs of franchised-and-managed hotels. The company is well-positioned to leverage its solid business fundamentals to navigate through challenging time and to capitalize on the long-term growth prospects within the travel and lodging industry in China.

Turning to specific results, total revenues for third quarter increased 61.8% year over year to RMB1.6 billion. Our organic revenue reached RMB1.2 billion, a 21.4% growth year over year, exceeding our previous guidance. The uneven market condition throughout China, depending on the level of concentration of manufacturing industries and the maturities in economic development, presents challenges as well as opportunities for us to operate [homogeneous] hotel products. We see the price opportunities driven by seasonality and events in relatively strong markets and effectively managing the yield between price and occupancy rate in soft market -- in soft markets.

Occupancy rate of the core business was still relatively high at 92.7% compared with 94.1% in the same quarter last year. And the RevPAR of RMB164 this quarter compared with RMB169 a year ago was in line with market conditions. Excluding Motel 168, 833 mature hotels that have been in operation for at least 18 months achieved RevPAR of RMB177, flat from last year. By end of the third quarter, we had six hotels operating under the midscale Yitel brand, four of which have been operation for nine months or less. The overall occupancy rate for the Yitel was 89.2% in the third quarter. We are very encouraged by the development of the Yitel framework and excited about its future to further our multi-brand strategy.

Total revenue for Motel 168 was RMB398.9 million in the third quarter, coming at the high end of the revenue guidance. Occupancy rate and average daily rate continued to increase, taking advantage of seasonality as well as incremental benefit from integration efforts. The core branded operation armed to address the challenging of large-scale hotels is showing positive results, with double-digit increase in RevPAR by the entire base during the preliminary testing period. Based on this initiative success, we have identified another 15 to 20 locations to gradually adopt this conversion in the next six months.

The restructuring of Motel 168 to food and beverage operation had been consolidated with co-branded initiatives. To further update everyone to Motel 168 integration, I'm pleased to report that as of November 1, Motel 168 and the core Home Inn brands will consolidate to form the economy hotels, led by our Chief Operations Officer. After the first stage of stabilization and foundation building, this reorganization is another step forward in our integration plan to fully leverage the company's institutional strengths and maximize resource utilization at regional and city operation levels to drive execution effectiveness.

Moving on the hotel development, we opened a total of 108 new hotels, including 39 new leased-and-operated hotels, including two Yitel hotels and two Motel 168 hotels, and 69 new franchised-and-managed hotels, of which four were franchised-and-managed hotels for Motel 168 brand. Compared to the previous few quarters, we have improved our hotel operation pace given the healthy flow in the pipeline. At the end of third quarter, we had a robust pipeline of 252 hotels constructed or under construction, including 87 leased-and-operated hotels and 165 franchised-and-managed hotels. We believe our well-established and high-margin franchise platform will be a key aspect of our portfolio's growth and profitability expansion. Driven by strong demand in our franchised-and-managed hotels, we expect to open no less than 360 hotels in total for the year and exceed the high end of our new hotels opening guidance for the year.

As of September 30, 2012, our frequent guest program reached a new level of 10.6 million unique active non-corporate numbers, increased from 9.2 million as of June 30, 2012. Home Inns is voted the Chinese brand of the year 2012 by Chinese Central Television or CCTV, one of the largest television broadcasters in China. We continue to capitalize on our increasing brand value and our loyalty program continues to provide a stable revenue base across all our hotel brands.

In the first part of the year we implemented a new wave of cost control and productivity initiatives. The third quarter results showing the hotel personnel cost increase at our core business will keep below the level of revenue growth. Further, G&A as a percentage of gross revenue for the total group continued to decrease year over year as our headquarter operation generated further productivity gains during the quarter. The ability to manage and keep the cost increase in check is one of our competitive advantages and we expect to continue to benefit from the scale and leverage across the business as we grow our multi-brand portfolios.

Looking into the next six to nine months, we remain cautiously optimistic that the market environment may remain stable but material improvements may be slowly sure to come. We remain positive, however, on the long-term view of the growth of the Chinese economy and we'll continue to strengthen our brand equity and the scale of our networks. Combining a stable level of annual [unit expansion], a shift towards capital-free but margin-rich franchise growth [and space], well-integrated Motel 168 brand ready for new growth, fully-developed Yitel brand for scalable expansion, lean and productivity-driven operating structure and leverage, the company is strategically well-positioned better than ever to wade through external challenges and embark on another cycle of growth in revenues, profitability and cash generation in the near future.

With that, I will turn to Huiping.

Huiping Yan

Thank you, David, and hello to everyone on the call. I'm pleased to first discuss our third quarter results and will then provide our guidance for the full year.

Once again the company has consolidated Motel 168 operation and financial results since October 2011, we have presented consolidated group numbers in the main body of our earnings release. Business and financial figures exclusive of Motel 168 are being presented separately in an appendix to the earnings release. Financial data for the group and exclusive of Motel 168 are also presented in spreadsheet attached to our earnings release, which is available for download from our Investor Relations website. On this call I will review group financial results as well as selected non-Motel 168 information to provide more context. As I take you through the numbers, please note that I only speak in RMB terms unless specifically mentioned.

For the third quarter, total revenues for Home Inns Group were RMB1.6 billion, increasing 61.8% year over year. Excluding Motel 168, total revenues were RMB1.2 billion, an increase of 21.4% year over year. Total revenue from leased-and-operated hotels was RMB1.43 billion, a 62.3% increase year over year and a 10% increase sequentially. Excluding Motel 168, total revenues for leased-and-operated hotels were RMB1.05 billion, increasing 19.1% year over year and 11.7% sequentially. Total revenues for franchised-and-managed hotels were RMB166.6 million, increasing 57.2% year over year and 11.3% sequentially. Excluding Motel 168, total revenues for franchised-and-managed hotels were RMB148.8 million, increasing 40.5% year over year and 12.7% sequentially.

Total operating costs and expenses excluding share-based compensation expense, acquisition and integration costs, were RMB1.3 billion, representing 81.6% of total revenues, compared with RMB77.6 for the same quarter a year ago and 82.4% for the previous quarter. Total leased-and-operated hotel costs excluding share-based compensation expenses and integration costs were RMB1.19 billion, 82% of the leased-and-operated hotel revenues, compared to 76.3% of leased-and-operated hotel revenues in the same period of 2011, and 84.3% in last quarter. This year-over-year increase in expense ratio was mainly driven by overall soft market conditions not suitable for systematic price increases, higher cost ratio from Motel 168 hotels which are still being integrated, and certain non-recurring charges to other operating costs. The sequential decrease in this ratio was mainly driven by seasonality.

Excluding Motel 168, total leased-and-operated hotel costs, excluding share-based compensation expenses, integration costs, were RMB836.7 million, representing 79.6% of the leased-and-operated hotel revenues, compared to 76.3% for the same quarter in 2011 and 81.8% for the second quarter of 2012. The year-over-year increase in this expense ratio was again mainly driven by softer market conditions resulting in lack of price opportunities and certain one-time charges. The sequential increase in this ratio was mainly attributable to seasonality.

Excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels was RMB42.6 million, representing 25.6% of franchised-and-managed hotels revenues. This compared to 22.4% for the same quarter of 2011 and 20.2% for the second quarter of 2012. The year-over-year increase in its ratio was mainly due to impact of Motel 168 as the revenue from franchised-and-managed hotels at Motel 168 was relatively lower while it's been integrated. The sequential increase in this ratio was mainly due to a higher accrual of performance-based bonuses in the third quarter.

Excluding Motel 168, total personnel costs of franchised-and-managed hotels excluding share-based compensation expenses were RMB35.1 million, representing 23.6% of franchised-and-managed hotel revenues compared to 22.4% for the third quarter of 2011 and 18.8% for the second quarter of 2012. The slight year-over-year increase in this expense ratio are driven by slightly lower revenue base due to market conditions, while the increase in dollar amount of such costs are in line with unit increase of franchised-and-managed hotels. The sequential increase in this ratio was mainly due to a higher bonus accrual of performance-based bonus in this quarter.

Excluding share-based compensation expenses, sales and marketing expense were RMB17.9 million, representing 1.1% of total revenues, compared to 1.6% in the same period a year ago and 1.0% in the second quarter 2012. We maintain vigilant cost control on maximizing return on investment, and the level of sales and marketing spending is well-managed to continue to support a growing revenue base.

General and administrative expenses excluding share-based compensation expense and integration costs were RMB57.4 million or 3.6% of total revenues, compared with 5.5% of the total revenues in the same period of 2011 and 3.7% in the second quarter of 2012. The company continues to benefit from economy of scale and leverage.

The above resulted in an income from operations, excluding share-based compensation expenses, acquisition and integration costs, of RMB204.7 million or 12.8% of total revenues, compared to RMB160 million or 16.2% of total revenues in the same period 2011 and RMB170.4 million or 11.8% of total revenues in the second quarter 2012. The year-over-year decrease in the ratio of income from operations was mainly caused by a higher cost ratio at Motel 168, absence of systematic selling price increase, and one-time charges. The sequential increase was mainly due to seasonality.

Adjusted EBITDA was RMB375.5 million or 23.5% of total revenues compared to RMB272.9 million or 27.6% of total revenues in the same period in 2011 and RMB331.6 million or 22.9% of total revenues in the second quarter of 2012. Excluding Motel 168, adjusted EBITDA was RMB322.3 million or 26.9% of total revenues compared to RMB272.9 million or 27.6% of total revenues in the same period of 2011 and RMB274.3 million or 25.6% of total revenues for the second quarter of 2012.

Adjusted net income attributable to Home Inns Group's shareholders was RMB135.8 million for the third quarter compared to adjusted net income of RMB132.0 million in the same period of 2011 and adjusted net income of RMB108.5 million for the second quarter of 2012. Adjusted diluted earnings per ADS for the third quarter of 2012 was RMB2.93 or USD0.47.

During the third quarter, the company generated a net operating cash flow of RMB239.9 million compared to RMB276.9 million in the same quarter of 2011. Capitalized expenditures for the third quarter 2012 were RMB357.4 million, while related cash paid for CapEx during the quarter was RMB225.3 million. We believe the cash generation capability of the company will strengthen as Motel 168 performance further improves and normal annual price increases resume when market condition improves.

As of September 30, 2012, Home Inns Group had cash and cash equivalents of RMB752.5 million. The outstanding balance of convertible bonds issued in 2007 was RMB113.5 million including principal and accrued interests. Financial liability of the convertible notes issued in December 2010 and interest rate swap contracts both measured at fair value totaled RMB1.03 billion. During the third quarter, the company paid an additional USD21 million towards it US dollar denominated four-year term loan, bringing the outstanding [face] balance of the term loan down to USD124 million.

For outlook, we expect a stable operating environment in a broad sense and uncertainties within certain markets relatively more impacted by economic structural reform. We are reaffirming our previously provided revenue expectations for the full year of 2012 which are gross revenues for the total group are expected to be in the range of RMB5,715 million to RMB5,810 million. Gross revenues for Motel 168 brand for the full year are expected to be in the range of RMB1,475 million to RMB1,500 million. Gross revenues for the full year of 2012 excluding Motel 168 are expected to be in the range of RMB4,240 million to RMB4,310 million.

The company expects to deliver on our leased-and-operated hotel opening target of 105 to 125 hotels for the full year. And as David mentioned earlier, the strong growth momentum of franchised-and-managed hotels will top the total number of our new hotel openings in 2012 over the high end of our previous guidance of 360.

Above forecasts reflect the company's current and preliminary view which are subject to change.

Now, we'd like to open the phone lines for questions. Operator, please?

Question-and-Answer Session

Operator

[Operator Instructions].

And your first question comes from the line of Ella Ji with Oppenheimer.

Ella Ji – Oppenheimer

Hi, good morning. Good morning, David, Huiping and Ethan.

David Sun

Good morning.

Huiping Yan

Good morning, Ella.

Ella Ji – Oppenheimer

Thank you for taking my questions and congratulations on a good quarter.

Huiping Yan

Thank you.

Ella Ji – Oppenheimer

I want to ask about Motel 168. So it's nice to see you have some sequential improvements. So I just wonder if you can break down to the details and give us some color in terms of what have you really done that have helped with this improvement. And do you think that's sustainable?

Huiping Yan

Sure. Thank you, Ella. Yes, the growth or improvements in the performance of Motel 168 continues as we generate the past four quarters of integration results. The occupancy rate in the third quarter was 82.7% for Motel 168. That increased from last year by at least 5% to 10% range. And that is a result of the overall integration effort that largely put in place in the first phase. In our previous earnings announcement, we've talked about phase two focus is more on execution, while we have laid the foundational work in phase one.

So there will be -- there is a level of seasonality benefit at Motel 168's operation in the third quarter, but largely the improvements came from our existing integration effort. And as we have talked about, that the second phase will be focused on the effectiveness of execution, and with our reorganization in our overall economy hotel operation segment, we believe the performance will further continue.

And if I may just further elaborate on that reorganization, this is a natural progression of going to a very carefully designed integration plan, an integration plan largely based on gap analysis of will it -- and also what it takes to close the gap. If you first look at our core business, it is mature in its size and reach and it has well-established operating rhythm and framework including sales and marketing, quality control, risk management, and solid human resource operations. These fundamental elements are from years of accumulation at the regional level, city level, as well as hotel level and are institutionalized. It is not easily shaken and will only strengthen going forward. And this is our core operation.

Motel 168, when we acquired it, is a living and breathing sizable brand and underlying operations in existence for a good number of years and cannot be easily absorbed. After the first 12 months or so of phase one integration which are mainly focused on stabilization of the existing operations and workforce, foundational investment to bring the quality of hotel facilities up to standards, and established implementation of operational procedures and discipline based on knowledge of best practices we have at the core business in areas such as sales and marketing framework, comprehensive training and developing of the people, as well as the KPI metrics implementation. Looking at the past four quarters, the results of Motel 168 is evident that the first phase integration effort are generating positive impact.

The second phase mandate, as we have described, to drive more proficiency in execution, the immersion of Motel 168 operation into that of our core Home Inns business is aimed to achieve precisely that. So, depending on the hotel concentration level at each of the region and city and human resource capabilities of the entire business, Motel 168's operation is being integrated into that of our core operations at either the regional level or the city level where it fits, so that the cultural influence and transformation will be at the molecular level, so to speak. It will drive effective execution and enhance the overall resource utilization.

So I think it's a long answer to your question, Ella, but it provides the context of why we do it now and why we -- and how we are doing it in terms of the integration, further integration of Motel 168. We believe the existing effort has generated results that are so-called low-hanging fruits, and then going forward, the focus and effort will be on again execution and delivering results. Thank you.

Ella Ji – Oppenheimer

Sure. Thank you for the details and we look forward to that. So in the meanwhile, I realize that the Motel 168's margin is a little bit declined comparing to 2Q. So, can you also explain on that and what's the outlook going forward?

Huiping Yan

Sure. The integration of the underlying operations is still in progress while we revamp or retool the food and beverage business, overall profitability has improved. But as we have talked about before, there will be some pluses and minuses in where we will add certain [individual] and certain level of costs to strengthen its performances. And also particularly in third quarter because of the bonus accrual, we -- due to better performance of the seasonality driven results, we are seeing a slight increase in the margin pressure, so to speak. But we believe the overall framework is well-maintained and established and we shouldn't be seeing a deterioration going forward.

Ella Ji – Oppenheimer

Great. And then my next question is about the new hotel opening mix between leased-and-operated and franchised-and-managed. So your peer companies are moving towards more franchised-and-managed in a very obvious way. So I was wondering if you can also talk about your thoughts in the mix going forward.

And also, I noticed there's a strong demand for being a franchised hotel -- franchised economic hotel on the market. Do you think such demand is really sustainable over the long term? Thanks.

Huiping Yan

Thank you. It's a very good question. And as you can see, that we always take a very balanced approach between the two business models. In the recent couple of years, franchised business, based on its matured platform, increasing in our total opening proportion, and that is in line with what we see in the marketplace as the franchised model being well-understood, and also the attractive investment opportunity is driving an increasing demand for this model. Internally, as our overall framework is mature and ready and also the brand's awareness is increasing, allowed us to build an even stronger franchised pipeline. And as we talked about for the total year of 2012, we will be opening above our previously guided top-line -- top number of the hotel openings of 360, and that is largely driven by the franchise hotel opening coming in above our expectations. The franchised-and-managed hotel system is perfecting. It is one of the best-run program across the economy hotel competitive environment, if you will, and we are very confident that we are continuing attracting new franchised-and-managed hotel prospects or investors.

Ella Ji – Oppenheimer

Great. That's all my questions. Thank you.

Huiping Yan

Thank you, Ella.

Operator

And your next question comes from the line of Billy Ng with Bank of America.

Billy Ng – Bank of America Merrill Lynch

Hi, good morning. Thanks for taking my questions. I have three quick questions. One, basically when I look at your fourth quarter guidance, since you have such a great third quarter, it seems like comparatively the fourth quarter's guidance is relatively conservative. So, can you tell us a bit more about the softness on the revenue, whether it's coming from -- because of the congress or because of the weather? And more importantly, if you may, can you tell us a little bit more about how you think about next year in terms of the demand and in terms of your opening schedule? That's my first question.

Huiping Yan

Okay. Thank you, Billy, for your question. First of all, we don’t think there are strong upside in the fourth quarter guidance because we do consider the level of uncertainties that still exist, as well as seasonality. We all know the fourth quarter typically is a slower quarter compared to the second and the third quarter. So, for the guidance that we provided and reaffirmed for the full year, you are still looking at a high-teens or close to 20% year-over-year growth. So that is still a strong growth target that we have set for ourselves, and we are with a level of confidence in achieving that goal. And I hope that answers your question.

Billy Ng – Bank of America Merrill Lynch

Yeah.

Huiping Yan

What we will do is continue to monitor the overall market environment and the overall growth of our business and next year 2013 shouldn't be less than 2012. So that will continue to fuel our top-line growth going forward.

Billy Ng – Bank of America Merrill Lynch

And was there any one-off, like as I mentioned, like the congress, the national congress, does that impact business travel for a week or two? Or the particular cold weather we saw recently, was that an impact too?

Huiping Yan

Yes, you are absolutely right. The weather condition is one element, and then there are events here and there depending on where the market is. So again we have done the practice in the third quarter, opportunistically finding the pricing opportunities, and we will seize those opportunities again going forward, where the weather impact, the storm in the north also affects our total business. But again, because of our strength in the total portfolio and the geographic spread, we are balancing the total portfolio.

Billy Ng – Bank of America Merrill Lynch

Thanks. My second question actually is regarding to the balance sheet, that may answer my third question too, like for the balance sheet, I think like you paid down some of the long-term debt. I'm just curious like whether any of the CB been paid down or it's mainly from the loan for the Motel 168 acquisition?

And the reason I want to ask that, because it seems like the diluted shares outstanding have changed. Last quarter it's over 100,000, this quarter is 92,000. So I just wonder what caused that change.

Huiping Yan

Okay. First of all, the balance sheet changes, the pay-down of the debt is exclusively of the term loan. We have no buyback of any of the existing CBs or the majority of the CB which is issued in 2010, USD184 million face value, is not going to mature until December of 2015.

The second question related to our --

Billy Ng – Bank of America Merrill Lynch

The share count actually. Maybe it's an easy one --

Huiping Yan

Yes. Any time, every quarter when we calculate the diluted share, we make assumptions of whether the CB has been converted or not, and we select the most dilutive number which is the lowest calculated amount. And in this case, the number of shares that we utilized in calculating the diluted share, it just so happened the conversion is not fully taking place. So therefore you see the share fluctuation.

Billy Ng – Bank of America Merrill Lynch

Okay. Thanks. I don’t have further question. Thanks a lot. Congratulations on good results.

Huiping Yan

Thank you, Billy.

Operator

Your next question comes from the line of Jamie Zhou with Macquarie.

Jamie Zhou – Macquarie Research

Hi, Huiping. Thanks for taking my question. I've got a couple of questions for you. First one is on a follow-up to the previous question on Motel integration. So as you have mentioned that you haven't identified 15 to 20 other hotels for multi-brand operations conversion in the coming quarters, can you give us a sense of how would that impact the integration cost going forward, as well as what specific measures besides these 15 to 20 identified hotels are you planning to do to further drive RevPAR recovery at Motel 168? That's my first question. Thanks.

Huiping Yan

Okay. Thank you, Jamie, for your question. The integration cost year to date is RMB76.5 million, and together with RMB23.6 million that we did spend in 2011 fourth quarter, we're looking at around -- a little over RMB100 million, or about USD16 million or so. And our previous integration budget as we planned was RMB20 million to RMB25 million. So in the fourth quarter we expect to spend somewhere around RMB30 million to RMB45 million and then the rest will trickle into 2013. The conversion of the co-branded framework is within our integration budget.

And then the second part of your question is specifically what we are doing on the co-branded. As the first couple of pilot that we've run, the results overall combined for the total base is that the RevPAR had increased double digits, and that is very positive results and we would like to further roll that similar operational framework into the other 15 to 20 suitable locations, as David had mentioned earlier. So it's, very simply put, with limited amount of investment, we are utilizing the strength of our existing Home Inns brand and capturing a greater segment of the market within that particular location of the large-scale hotel with Motel 168 and Home Inns brand coexisting in similar if not adjacent -- in the same if not adjacent properties. And the overall result is not only improvements on the top line but certainly, as a result, the profitability will improve as well, Jamie.

Jamie Zhou – Macquarie Research

I see. Thanks, that's helpful. My second question is relating to Home Inns' core operations excluding Motel 168. As you have mentioned earlier that you still don't see a systematic opportunity to raise your rates. However, you did also in your earnings release that you are seeing opportunistic pricing in selective markets. Do you mind just sharing with us in which markets, what tier cities are you seeing higher pricing opportunities, and which group of customers are you seeing those opportunities? Thanks.

Huiping Yan

Sure. The opportunist price increase first is enabled by better seasonality. And then as we look across China, there are unevenness in the market conditions where economies are more sophisticated or more complex. For example, in Beijing, it has political, it has travel, it has business, so it's a more mature and complex economy. In those markets we were able to take advantage of the seasonality as well as taking advantage of the events surrounding the various activities taking place in those stronger economies and getting price. And that is reflected in our mature hotel base generating flat year-over-year RevPAR despite soft market condition across China.

Jamie Zhou – Macquarie Research

I see. So if I understand correctly what you just said now, is that the more mature markets you're seeing higher pricing opportunities whereas the lower-tier markets where you see greater expansion opportunities are not having such an opportunity for the time being?

Huiping Yan

To an extent you are correct, but the more so it is impacted by seasonality. So in other words, in the fourth quarter, because the seasonality is generally lower and we wouldn't see this level of opportunity.

Jamie Zhou – Macquarie Research

I see. Thanks. My last question, just quickly, if you could share with us the progress of your Yitel expansion. As you were mentioning, you're impressed with the current existing operation and you're looking to add more Yitel hotels in the coming quarters. Can you remind us what is the current expansion plan for detail heading into 2013? Which markets are you looking to add these new Yitel hotels, as well as ADR and CapEx per room trends? Thanks.

Huiping Yan

Sure. As David mentioned earlier, Yitel as a group achieved 89.2% occupancy rate in the third quarter, and given the fact that four of the six in operations were only in operations for nine months or less, as you know, Yitel as a mid to upper scale product generally has a longer ramp-up period and it's doing quite well for the Yitel brand, and we are very pleased and encouraged. The growth plan for Yitel this year is still five to six in total increase and then next year, as we continue to formalize the Yitel framework, which is largely in place now, we are looking to add six to ten.

Jamie Zhou – Macquarie Research

And the CapEx and the ADR?

Huiping Yan

The CapEx for Yitel is almost double the level of Home Inns Express model, somewhere around RMB125,000 to RMB130,000 per room. The ADR level, right now it's still early to say because the majority of our hotels are still in the ramp-up phase. The target ADR level for Yitel is 300 to 350, and then further as the brand establishes its presence and scale, we are looking to potential upside on that aspect.

Jamie Zhou – Macquarie Research

Okay, great. Thanks very much. Thanks.

Huiping Yan

Thank you.

Operator

Your next question comes from the line of Fawne Jiang with Brean Capital.

Fawne Jiang – Brean Murray

Good morning, David and Huiping.

Huiping Yan

Good morning.

Fawne Jiang – Brean Murray

First question is actually regarding your store opening for next year. You're guiding you're planning to open like more than 360 stores. Just wonder whether you could give us a little bit color in terms of new stores allocation in terms of different brands as well as different tier of cities, also like what's the split between leased-and-operated versus franchised model.

Huiping Yan

Sure. In 2013 we are looking to potentially open similar level of total new hotels for across the three brands. For Yitel we just talked about we might be adding six to ten, and for Home Inns we're looking to add -- for Motel we are looking to add 50 to 60 in total, and then the rest will be for Home Inns. The split between leased-and-operated and franchised will be around 65% or even 70% being franchised, and then the rest will be leased-and-operated.

Fawne Jiang – Brean Murray

How about the geographic penetration in terms of different tier cities?

Huiping Yan

Yes. The focus will continue to be on the second and the third-tier cities, about 80% to 85% of the new hotel openings will be in those cities, because we are still a firm believer of where the growth of economy will take place in the second and the third-tier cities.

Fawne Jiang – Brean Murray

Got it. Second question is actually a follow-up on Motel 168, it seems like the occupancy rate for Motel 168 continue to improve in 3Q. Also you mentioned that the company is basically launching the second phase for integration. So I just wonder like what are the key potential targets for Motel 168 for 2013, primary on the basic or the occupancy rate, RevPAR target, as well as the potential margin improvement in '13?

Huiping Yan

Yes. The integration of Motel 168 is still well on track. When we acquired Motel 168, the pro forma view is for us to achieve a level of occupancy rate of 85% plus for the total portfolio or existing portfolio, and then also achieve a RevPAR level of 135 or so. And then that is the overall goal. And we are still on-target to achieve that. And then the timing of that again is sometime in the second half of 2013 we will achieve that and then for the full year of 2014 we will have EPS accretive.

Fawne Jiang – Brean Murray

Got it. Huiping, just quick reminder, what's the approximate RevPAR for 2012 for Motel 168 we are likely to hit?

Huiping Yan

The RevPAR for Motel 168 in the third quarter was RMB134, and we think that with the overall performance in the past three quarters reaching RMB125 to RMB128 is achievable.

Fawne Jiang – Brean Murray

Got it. Thank you very much.

Huiping Yan

Thank you.

Operator

And your next question comes from the line of Justin Kwok with Goldman Sachs.

Justin Kwok – Goldman Sachs

Hi, good morning. Thanks for taking my question.

Huiping Yan

Thank you, Justin.

David Sun

Hi, Justin.

Justin Kwok – Goldman Sachs

Just two quick questions. The first one is on the Yitel expansion. As you mentioned, you continue to open this year and also adding potentially another 10 next year. And also refer to your comment that you think some of the bigger cities or more sophisticated cities are seeing relatively better performance than the others, how are you going to implement the Yitel strategy in view of these figures? Are you still focusing mainly on the tier 1 cities or are you willing to spread that to tier 2 cities, even though you may see more relatively softer environment in the next one or two quarters? That's my first question.

Huiping Yan

Yes. The overall strategy for Yitel is to target first-tier and also key second-tier cities. Those will be the provincial capitals. And that remains to be our growth strategy for Yitel. And further to that, in next year, out of the six to ten we may be opening, there might be about two or so coming from the franchised model. So in other words, we are rolling out the franchised model for Yitel next year, and again leverage the market demand and awareness of the franchised model, we will be partnering with investors to run those hotels' franchise or maybe taking on a new form of a managed operation.

Justin Kwok – Goldman Sachs

Do you mind to talk a little bit more on the -- you said a new form of management?

Huiping Yan

This is not something new. We will be -- basically no investment again, but taking on a management contract of running a mid to upper scale hotel that is under our Yitel brand.

Justin Kwok – Goldman Sachs

Yeah, okay, I see. Thank you. My second question is going back to the co-brand or multi-brand property for Motel 168 and putting it with Home Inns together, do you mind to give a little bit more color on what you're seeing in your pilot scheme, the room rate differentials between the two brands, and also the customer mix differential? And how are you going to safeguard the existing core brand from being cannibalized with putting it so close to the new motel product? Thanks.

Huiping Yan

Yes. The concept of this co-branded operation is really not new out of the integration of Motel 168. In our practice or in our operations day to day, we have already -- have properties that are closely located or if not located in the same building with other brands, Green Tree, even 7 Days, or Motel 168 and Home Inns in the same buildings, and they each achieve high occupancy rate. And it's mainly driven by the slight differences in the brand perception and it's attracting different segments of the customer coming from the economy hotel segment.

And then what we have looked at is the pricing are very similar between the two products while the customer base could have a presence for either Home Inns or Motel 168. So with those selected locations, we are able to capture a greater part of the market, so to speak.

And then the two particular pilot program that we have run, what we've done is some experimental practices to where we took the occupancy rate as a secondary to price, and then we reversed the practice to take the price, taking as the secondary to occupancy rate. So throughout the practices, the overall results is that we could maintain similar level of pricing but generating high occupancy rate, proving the fact that co-branded operations is indeed able to bring in more customer base -- more customer as opposed to generating the customer base on a single brand operations.

Again the emphasis is on selected locations; that's why we are very cautious and gradual in implementing this model.

Justin Kwok – Goldman Sachs

All right, thanks. Just a quick follow-up, do you see a noticeable difference between business and leisure travelers among these two brands?

Huiping Yan

It's still fairly similar.

Justin Kwok – Goldman Sachs

Okay. Thank you.

Huiping Yan

Thank you.

Operator

I would now like to turn the call over to management.

Huiping Yan

Thank you, everyone, again for your time and attention and joining our earnings call today. We have delivered a very strong quarter and we will continue to stay focused on internal operational efficiencies and motel integration success going forward. Thank you again. We will speak to you soon.

Operator

This concludes today's presentation. You may now disconnect.

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Source: Home Inns & Hotels Management's CEO Discusses Q3 2012 Results - Earnings Call Transcript
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