Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

7 Days Group Holdings Limited (NYSE:SVN)

Q4 2012 Earnings Conference

March 11, 2013 10:00 p.m. EDT

Executives

Vivian Chen – IR Director

Yuezhou Lin – CEO

Eric Haibing Wu – CFO

Analysts

Justin Kwok – Goldman Sachs

Billy Ng – Bank of America-Merrill Lynch

Lin He – Morgan Stanley

Fiona Zhang – Oppenheimer

Long Lin – Brean Capital

Operator

Welcome to 7 Days Group Fourth Quarter and Full Year 2012 Financial Results Conference Call.

[Operator Instructions].

I would now like to turn the call over to Ms. Vivian Chen, Investor Relations Director for 7 Days Group. Ms. Chen, please go ahead.

Vivian Chen

Thank you, operator. Good morning and good evening to all participants. On behalf of 7 Days Group, I would like to welcome everyone to our fourth quarter and full year 2012 results conference call.

Joining the call today are Mr. Yuezhou Lin, our CEO, and Mr. Eric Haibing Wu, our CFO. After the US markets closed today, 7 Days issued a press release announcing the fourth quarter and full year 2012 financial results.

The release is available on the company's IR webpage at the en.7daysinn.cn, along with the presentation for today's call. This call is also being broadcast live over the internet.

Before management's presentation, I would like to refer to the Safe Harbor statement in connection with today's conference call. During today's presentation and question-and-answer session, we will make forward-looking statements, including those with respect to expected future operating results and expansion of our business. I would like you to refer to the risk factors inherent in our business and that has been filed with the SEC and is also on our corporate website under the Investor Relations section. Actual results can be materially different from any forward-looking statements we make today.

Also the results announced today are unaudited and subject to adjustments in connection with the completion of the audit. In discussing the financials, we will use EBITDA and certain other non-GAAP measures which exclude share-based compensation expenses. These non-GAAP operating measures are useful for understand and assessing underlying business performance and operating trends. A reconciliation of the GAAP to non-GAAP fourth quarter and full year 2012 results could be found in today's earnings release which has been posted to our website and also in the appendix to this presentation.

Please also note that all the numbers discussed in this conference call are in RMB terms.

Now I would like to turn the call over to Mr. Lin, our CEO. Mr. Lin will be speaking in Chinese and his statements will be translated into English. Mr. Lin, please.

Yuezhou Lin

INT: Hello, everyone, and thank you for joining our earnings conference call today.

Earlier today we reported results for the fourth quarter and full year 2012. The company recorded net revenues of RMB696 million, an increase of 27.6% year over year, exceeding our revenue guidance. The net income attributable to our shareholders was RMB7.9 million, marking the 12th consecutive profitable quarter for 7 Days since the first quarter of 2010. During the fourth quarter 2012, the total room count for all hotels in operation increased over 40% year over year and the total transaction value or TTV reached RMB1.52 billion, an increase of about 40% on a year-over-year basis.

For the full year 2012, the company recorded net revenues of RMB2.56 billion, an increase of 27.6% year over year. The net income attributable to our shareholders was RMB176.0 million. During 2012 the total room count for all hotels in operation increased about 40% year over year, and the total transaction value or TTV increased over 50% on a year-over-year basis to RMB5.58 billion, which is a strong indicator of the company's rapidly increasing brand influence and market share in China's economy hotel industry.

We continue to execute our rapid growth strategy in the fourth quarter 2012, with the addition of 109 new hotels to our network, including 32 leased-and-operated hotels and 77 managed hotels. During the full year 2012, we opened 401 new hotels, including 81 leased-and-operated hotels and 320 managed hotels. As of the yearend 2012, we had 1,345 hotels in operation with a presence in 208 cities across the country, including 492 leased-and-operated hotels and 853 managed hotels. Together with the hotels under conversion, we had 1,568 hotels in China.

In mid-June 2012, we announced that the company's long-term development strategy would focus on the rapid expansion of managed hotels, as we believe that the managed hotel model is the key to the company's future rapid growth. By leveraging the advantages of managed hotels, the company is able to generate stable revenue growth by maintaining a rapid pace of expansion, getting greater operational leverage, expanding its brand presence and brand influence with a high return on employed capital. These factors have resulted in increasing profitability and stronger free cash flow generation. Also we are glad to see that we have already received certain preliminary benefits, thanks to the strategic shift.

Together with our rapid expansion over the past few years, we have continued to upgrade our hotel facilities and improved services for our guests, and we remain committed to providing a better guest experience for our customers in the future. With our expanded hotel portfolio and increased member base, our brand image has continued to improve among customers. In November 2012, the company was named CCTV China brand due to its continued innovation of its eCommerce platform, its improved guest services, its fast growth of 1,500 hotels within seven years of operation, and also for having the largest loyalty program in the economy hotel industry in China, which currently consists of more than 50 million members. We believe that our huge membership base and industry-leading proprietary eCommerce platform will remain an important driving force behind 7 Days' future expansion.

We expect to add 360 new hotels to our portfolio during fiscal year 2013, including 50 leased-and-operated hotels and 310 managed hotels. We estimate that net revenues will grow by 15% to 18% on a year-over-year basis.

Before handing the call over to Eric, let me review the current status with regard to the going private proposal received by the company. The Board of Directors has received a proposal letter dated September 26 from certain existing shareholders of the company, including Mr. Boquan He, Nanyan Zheng and Carlyle Group and Sequoia Capital China and their respected affiliates to acquire all of the outstanding shares of the company not currently owned by them in a Going Private transaction.

On February 28, 2013, the company announced that it entered into a definitive agreement and plan of merger with various parties pursuant to which Keystone Lodging Company Limited will [require] 7 Days Group for USD4.60 per ordinary share or USD13.8 per ADS. This consideration to be paid in the merger represents a 30.6% premium over the closing price of USD10.57 per ADS as quoted on September 25, 2012 which was the last trading day prior to the announcement of September 26, 2012 that it has received a Going Private proposal and implies the actual value for 7 Days Group for approximately USD688 million on a fully diluted basis.

The company's Board of Directors acting upon the unanimous recommendation of the special committee formed by the Board of Directors approved the merger agreement and the merger and also resolved to recommend that the company's shareholders vote to authorize and approve the merger agreement and the merger. The merger, which is currently expected to close during the second half of 2013, is subject to customary closing conditions as well as the approval by an affirmative vote of holders of the company's ordinary shares, representing at least two-thirds of the ordinary shares present and voting in person or by proxy as a single class at a meeting of the company's shareholders which will be convened to consider the approval of the merger agreement and the merger.

I will now turn the call over to Eric to give a more in-depth look on our financial results. Eric, please.

Eric Haibing Wu

Thank you, Yuezhou. Good morning and good evening to everyone on the line.

As Yuezhou noted, 2012 was a year of continued growth and expansion for 7 Days as we delivered consistent top and bottom line growth while expanding our hotel portfolio across China. We maintained our track record of growth in the fourth quarter with revenue exceeding guidance and a strong increase in EBITDA. Our results demonstrate the benefit of our asset-light expansion strategy which has allowed us to maintain the rapid pace of expansion, gain greater operational leverage, expand our brand presence, and generate stable fee-based income, with a higher return on employed capital. We'll continue to execute our asset-light strategy moving forward into 2013, as demonstrated by our pipeline, 91% of which is comprised of managed hotels at the end of the fourth quarter.

Turning to our results in more detail, as a reminder, all financial figures provided are in RMB.

As shown on slide seven, in the fourth quarter we added 109 net new hotels comprising 32 leased-and-operated hotels and 77 managed hotels. The new addition to our network in the fourth quarter brought our total net new hotels open for the year to 401. Of the 401 hotels, 81 were leased-and-operated hotels and 320 were managed hotels, in line with our asset-light managed hotel strategy. In total, as of December 31, 2012, our network consisted of 1,345 hotels covering 208 cities and comprising 492 leased-and-operated hotels and 852 managed hotels.

As we move into 2013, we will continue to execute our managed hotels strategy as demonstrated by our yearend pipeline which is heavily weighted towards managed hotels. Given the fractured nature of the economy hotel segment and the long-term trend of increasing business and leisure travel in China, we're confident that the market as a whole will continue to grow, providing further opportunity for the steady expansion of our portfolio moving forward.

As a key element of our business model and underlying contributor to our sustained financial and operational growth, our industry-leading loyalty club continued to expand in 2012. Together with our powerful eCommerce system, these two elements comprise a meaningful competitive advantage which we will continue to leverage as the scale and scope of our hotel portfolio continues to grow.

As noted on slide eight, as of December 31, 2012, we have approximately 52.9 million 7 Days Club members, an increase of 67% year over year. Highlighting the benefit of our eCommerce system, approximately 70% of room nights sold were booked directly through our online system in the fourth quarter 2012.

Turning to our operational performance on slide 10, occupancy rate for leased-and-operated hotels were 79.2%, down from 86.4% in the fourth quarter of 2011. Occupancy rate for managed hotels was 77.4%, down from 80% in the prior-year period. Occupancy rate for the full year for leased-and-operated hotels and managed hotels were 82.9% and 80.3%, respectively, compared to 87.9% and 81.5%, respectively, in 2011. Our occupancy rate was mainly impacted by macroeconomic factors with some of our customers adopting a more conservative approach to spending.

Moving to slide 11, revenue per available room or RevPAR for leased-and-operated hotels in the fourth quarter was RMB113.4 compared RMB143.3 in the fourth quarter 2011. RevPAR for managed hotels in the fourth quarter 2012 was RMB121.9 compared to RMB123.5 in the same period of 2011.

For the full year, RevPAR for the leased-and-operated hotels and managed hotels was RMB138.3 and RMB126.9, respectively, compared to RMB146 and RMB127 in 2011. RevPAR for all hotels in 2012 decreased to RMB131.5 from RMB136.2 in 2011. While RevPAR was impacted by macroeconomic headwinds and the continued rapid expansion of our hotel portfolio, we're pleased to see that RevPAR in our mature hotels in the fourth quarter remained stable on a year-over-year basis.

Let me now turn to our financial performance for the quarter and full year. For the fourth quarter of 2012, total net revenue increased to RMB696 million, up 27.6% year over year, exceeding our guidance range. Gross revenue from leased-and-operated hotels increased by 22.9% year over year to RMB648.4 million and the gross revenue from managed hotel increased 72.9% year over year to RMB88 million. For the full year, total net revenue increased by 27.6% year over year to RMB2,557.2 million. Our fourth quarter and full year revenue growth was driven by the continued growth in the number of our hotels in operation.

As shown on slide 12, total hotel operating costs for the fourth quarter were RMB560.6 million, representing 80.5% of total net revenue, up from 77.5% of total net revenue in the fourth quarter of 2011. Preopening expenses for the fourth quarter were RMB13.9 million in the third quarter of 2012. For the full year, hotel operating costs were RMB2,033.5 million or 79.5% of the total net revenue, in line with 2011.

Sales and marketing expenses in the fourth quarter were RMB31.7 million or 4.6% of total net revenues versus 3.4% in the year-ago period and 2.8% in the third quarter of 2012. Sales and marketing expenses as a percentage of revenue increased on a quarter-over-quarter basis mainly due to business development activities and associated media and brand promotions at yearend and slightly increased advertising expenses and sales commissions during the fourth quarter of 2012. Sales and marketing expenses for 2012 were RMB82.1 million or 3.2% of net revenue compared with 2.5% of net revenues in 2011.

G&A expenses for the fourth quarter was RMB52.6 million or 7.6% of total net revenue compared to 12.7% in fourth quarter 2011 and 8.4% in the preceding quarter. The year-over-year decrease in G&A expenses for the fourth quarter were primarily due to the decreased impairment loss for property and equipment as well as decreased share-based compensation expenses. G&A expenses for fiscal 2012 were RMB201.3 million, 7.8% of total net revenue, down from 10.5% in 2011.

Moving to slide 13, income from operations was RMB51.1 million in the fourth quarter or -- which is 46.6% increase from RMB34.9 million in the same period last year. Income from operations for the full year 2012 increased by 59% to RMB240.3 million. Non-GAAP income from operations for the full year was RMB267.4 million, an increase from RMB194.6 million in 2011.

EBITDA was RMB141.2 million for the fourth quarter, a 30.3% increase over the same period last year. Adjusted EBITDA, which excludes share-based compensation, grew 24.1% over the fourth quarter last year to RMB146.4 million. Fourth quarter EBITDA margin was 20.3%, up from 19.9% in the period -- in the prior period, and adjusted EBITDA margin was 21%, down slightly from 21.6% in Q4 2011.

EBITDA for the full year 2012 was RMB581.3 million, up 41% year over year, and adjusted EBITDA rose 33.5% year over year to RMB608.4 million. EBITDA margin for the full year was 22.7%, up from 20.6% in the prior year, and adjusted EBITDA margin was 23.8%, up from 22.7% in 2011.

Net income attributable to our shareholders in the fourth quarter was RMB37.9 million, a 7.6% increase from RMB35.2 million in the fourth quarter of 2011, which marks the 12th consecutive quarter of profitability for 7 Days. Non-GAAP net income was RMB43.1 million, a slight decrease from RMB44.8 million in Q4 2011. Net income margin for the fourth quarter was 5.5%, down from 6.5% in the fourth quarter of 2011.

Net income attributable to our shareholders for 2012 was RMB176 million compared RMB128.9 million last year. Full year non-GAAP net income was RMB203.2 million, an increase from RMB172.4 million in 2011.

With continued growth, effective capital management and execution of our asset-light strategy, we have maintained a robust balance sheet, a summary of which is provided on slide 15. As of December 31, 2012, we have cash and cash bank deposits of RMB382.3 million. Net operating cash flow for the fourth quarter increased 45.5% year over year to RMB154.5 million. For the full year, net operating cash inflow increased by 25.1% year over year to RMB572.5 million. We believe that our asset-light strategy, which is emphasized on less capital intensive managed hotels will allow us to deliver healthy free cash flow levels moving forward in 2013.

Our strong performance in the fourth quarter and the full year demonstrate the merits of our strategy and our commitment to delivering profitable growth. We entered 2013 with a robust financial position and a healthy growth momentum, and believe that our continued focus on execution will allow us to deliver a sustainable performance in the year ahead.

Moving on to our guidance, we expect to generate total net revenue in the range of RMB620 million to RMB635 million in the fourth quarter of 2013 and the full year 2013 total net revenue to grow 15% to 18% over the full year 2012.

That concludes our presentation. Yuezhou and I would now be happy to take your questions. Operator?

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the Q&A session. [Operator Instructions]. Please limit yourself to two questions so as to be fair to all participants. If you have further questions, please queue again.

And your first question comes from Justin Kwok from Goldman Sachs. Please ask your question.

Justin Kwok – Goldman Sachs

Good morning. Thanks for taking my question. My first question is a very quick one, actually you mentioned that, regarding the Go Private offer, you need a two-third affirmative vote for the ordinary shareholders. I just want to check if there is any requirement or any restriction for the connected parties like the two chairmen to vote or everyone can vote in this round of shareholder voting? That's my first question.

Eric Haibing Wu

Hi, Justin. Yeah. The requirement is actually this Going Private proposed merger agreement requires the proof of buy and affirmative vote of the holders of the ordinary shares, representing at least two-thirds of the ordinary shares present, and the voting person or by proxy. It actually allow all shareholders to vote, including the connected parties.

Justin Kwok – Goldman Sachs

Okay, thanks, very clear. And my second question is related to the operating trend and also your guidance. I just wonder, in your full year guidance, how much of it is related to your unit growth or volume growth and how much of that related to your view on the same hotel room rate or RevPAR growth year over year? And if you look at the year-to-date performance, how has that been trending and what's your view on the possible more like system-wide room rate hike in second quarter or third quarter or even up to now coming back from the Chinese New Year low? Thank you.

Yuezhou Lin

[Chinese language spoken]

Eric Haibing Wu

Well, in our 2013 revenue projection, we expect to see a similar same hotel RevPAR growth as last year, which is around 1%. So we tucked in the 1% RevPAR growth, but the remaining, I guess, the revenue growth is driven by the unit growth.

Mr. Lin also mentioned that in Q1, in January and February, performance was relatively soft when comparing with year-ago period, but we have seen a very strong rebound in -- when moving into the month of March. So if you look at up to today, the Q1 overall performance up to today, the mature hotel RevPAR is already flat comparing with year-ago period.

Justin Kwok – Goldman Sachs

Okay. Could I just add one more question?

Eric Haibing Wu

Sure.

Justin Kwok – Goldman Sachs

Yeah. I remember earlier last year you mentioned about the venture into the higher-end segment. I just wonder if there is any update on that particular initiative and what's your view on that segment or your product? Thank you.

Eric Haibing Wu

Well, yeah, as to the high-end project which [we call it mainly] five-star projects, we're still preparing for the launch of the new brand, and a separate team is working on that initiative. Because each -- many five-star hotel requires significant CapEx. So, to ensure the successful launch of the first hotel, we have invested in significant amount of time and effort. So it ended up taking longer than we expected, originally expected at the beginning of last year. So basically we'll update the market and provide more detailed information in the future. At this point, we do not have a concrete plan in terms of when the first hotel will be opened. So we're still in the preparation stage.

Justin Kwok – Goldman Sachs

Thank you.

Operator

Your next question comes from Billy Ng from Bank of America. Please ask your question

Billy Ng – Bank of America-Merrill Lynch

Hi, good morning. Just two quick questions. The first one is regarding to the privatization proposal. Can you walk us through a fairly simple timeline, what should we expect in the next six months and what's the important events, in particular when we should see the voting happen?

And second question actually just to follow up with Justin's question, you mentioned you'll give us a lot of colors on the room rate trend in the first three months, and also just want to, maybe I missed that, but just want to clarify that for the whole year, what do you see the trend for the mature hotel room rate and occupancy for the rest of the year and how does that translate into your full year guidance?

Eric Haibing Wu

Billy, yeah, let me take the first question and Mr. Lin will address your second question. A typical Going Private deal at this point requires a customary -- the satisfaction of a customary closing condition as well as the shareholder voting. And within this process, the SEC review process will also take place. So that's the main steps before the closing of the deal.

But at this point, all we can state is really, as indicated in the press release issued on February 28, we expect the deal will be closed in the second half of this year. So that's basically what the company's view at this point.

I'll pass to Mr. Lin to address the second question.

Yuezhou Lin

[Chinese language spoken]

Billy Ng – Bank of America-Merrill Lynch

Okay. Thank you.

Eric Haibing Wu

Mr. Lin indicated the RevPAR growth of 1%, which already been factored in when we provided the revenue guidance for the full year which is 15% to 18% year over year growth.

Billy Ng – Bank of America-Merrill Lynch

Thanks.

Operator

Your next question comes from Lin He from Morgan Stanley. Please go ahead with your question.

Lin He – Morgan Stanley

Good morning, Lin, Eric and Vivian. Thanks for taking my question. I have two questions, one is on your new hotel opening target for 2013, you plan to add 50 leased-and-operated hotels. This number is lower than the leased-and-operated hotel addition in previous years and also lower than some of your competitors' target. Can you add a little bit more color off this strategic move? Is it because you want to keep free cash flow positive, lower CapEx, or you have seen that your return on investment profile for leased-and-operated hotel model is not attractive for you -- attractive enough for you to open more?

And second question is on RevPAR, blended RevPAR trend this quarter. We have seen an increasing ADR but a decreasing occupancy. Occupancy falls below 80%. Is this something related to your pricing strategy in 4Q? Can you please talk a little more detail about?

Yuezhou Lin

[Chinese language spoken]

Eric Haibing Wu

Okay. Well, the first question regarding the hotel expansion plan, as Mr. Lin indicated, in the year of 2012 we added total net new hotels 401, which is the industry record, in fact is the first time any company can open more than 400 hotels in one year. In 2013 we expect to maintain the same expansion speed with 360 hotels planned to be opened during the year. The fact that we reduced our leased-and-operated hotels target to 50, from 81 last year to 50 this year, is a reflection of our overall strategy that the company adopted at the beginning of last year to moving more toward SLI and managed hotel model. So it's in line with our overall strategic decision.

And the second question regarding the ADR and occupancy trend, Mr. Lin indicated that the movement of ADR has more to do with the city mix, change in the city mix. Our pricing strategy has been quite stable, consistent in the last few quarters.

Yuezhou Lin

[Chinese language spoken]

Eric Haibing Wu

Mr. Lin want to add that although if you look at the number of new hotels we plan to add in 2013, managed hotel target is 210, which is slightly less than the 320 hotels we opened in 2012, but the fact that we plan to close certain non-performing managed hotels during the year 2013. So if you only look at the new hotels we added during the year, it would be more than last year. So we actually maintain the similar speed.

And then he also noted that the Home Inns press release this morning on the 2013 opening plan, he believe there's a good opportunity by the end of the year 7 Days, considering the current expansion plan, 7 Days will become the single -- the largest single economy hotel brand by, if you look at the number of hotels in operation, by the end of this year.

Lin He – Morgan Stanley

[Chinese language spoken]

Yuezhou Lin

[Chinese language spoken]

Eric Haibing Wu

Well, yeah, Lin's question is regarding the closing of certain managed hotels in 2013, the reason, the number, et cetera.

Mr. Lin stated that the key reason which, let me correct what I just translated in the prior question, is not because that they're non-performing. It's mainly because of the VI, the product standard and also the customer satisfaction level basically do not meet our standards. So we have worked with the franchisees. A lot of the franchisees are going through this improvement process; they're trying to improve upon the VI, the product standard and the customer satisfaction. So, depending on the results, we're going to decide how many hotels to be closed. So right now at this point, there's not a clear definitive numbers.

Operator

Thank you. Your next question comes from Ella Ji from Oppenheimer. Please ask your question.

Fiona Zhang – Oppenheimer

Hi, good morning. Thank you for taking my questions. It's Fiona calling on behalf of Ella. I just have a quick question on your balance sheet. We have noted that your debt balance stayed flat from last quarter in 4Q. However, in the past quarters it's decreased on a quarter-over-quarter basis. So we were just wondering, do you have any plan to repay your debt in the near future? And can you just share some colors on that? Thank you.

Eric Haibing Wu

Yeah. If you look at the Q4, I guess you have to look at the short-term debt and the long-term debt on a combined basis. So if you combine the short-term debt and long-term debt, we're pretty stable. The debt level is roughly RMB250 million in the past two quarters.

Fiona Zhang – Oppenheimer

Okay. So that means you didn't repay any debt in 4Q.

Eric Haibing Wu

Yeah, we do not have a plan to significantly change our debt balance at this point.

Fiona Zhang – Oppenheimer

Okay. Okay, got it. You just noted that during the past quarters the debt balance somehow it's decreased. So, did you repay any in the past quarters?

Eric Haibing Wu

Yeah. What we did in Q3, if you notice, in Q3 our overall debt balance is actually reduced by a little over RMB100 million. So we did repay certain debt in Q3. But Q3, since Q3 and Q4, the total debt balance, if you look at short term and long term on a combined basis is pretty consistent.

Fiona Zhang – Oppenheimer

Okay. So going forward, you still expect it to be stable in the next several quarters?

Eric Haibing Wu

Well, we're going to constantly monitor our debt balance, and depending on the cash balance we generate from our operation activity, which we certain anticipate it in 2013, a free cash flow -- positive free cash flow being generated, so we will evaluate our debt balance and very likely will continue to reduce our debt balance as our free operating cash flow is generated.

Fiona Zhang – Oppenheimer

Okay, that's very helpful. Thank you. That's all my questions.

Operator

Your next question is from Long Lin from Brean Capital. Please ask your question.

Long Lin – Brean Capital

Hi, good morning. Thank you for taking my questions. My first question is regarding your EBITDA margin. Just wondering, how should we look at the margin trend in the first quarter in 2013? And for each of your hotel operating cost, how should we look at the trend for the quarter and the full year?

Eric Haibing Wu

Well, for fourth quarter, as everyone understand, it's a slow season because of Chinese New Year. So, usually the EBITDA margin will be down from Q4's level on a sequential basis. But if you look at the full year 2013, overall we expect that the adjusted EBITDA margin, we should be able to see a slight improved adjusted EBITDA margin, mainly because of the increasing contribution from our managed hotel business and reduction in the percentage of revenue -- the SG&A expenses as a percentage of revenue. So, overall I think that for the current year 2013, we're still confident that, although the cost -- hotel operating cost pressure is definitely there, but we should be able to offset the hotel operating cost pressure because we're generating a very healthy managed hotel revenue and also as we'll gradually realize the benefit of economy of scale as the sales -- SG&A expenses as a percent of revenue will continue going down.

Long Lin – Brean Capital

Okay, I got it. Thank you. My second -- actually, to just follow up on that, your sales and marketing expenses seems to be quite high this quarter, and just wondering if you can -- if you can talk about what kind of promotional activities did you for the quarter and like what are some of the promotional channel that you used. How should we look at the sales and marketing expenses going forward?

Yuezhou Lin

[Chinese language spoken]

Eric Haibing Wu

Well, for the fourth quarter, historically the last quarter of the year the sales and marketing expenses usually will go up. For this particular quarter, one specific reason, and Mr. Lin mentioned, is because in the last year, the internet marketing, which is something that we heavily rely on, the cost of internet marketing has increased quite significantly in 2012. And also in Q4, we're entering, penetrating into more tier 3, tier 4 cities, the lower-tiered cities, small cities, so we have to incur more expenses to promote our brand and to attract more customers. But overall, our estimate for the current year trend is the sales and marketing expenses as a percentage of revenue will be quite similar to last year's level, which last year is at 3.2% of net revenue.

Long Lin – Brean Capital

Okay, thank you, that's very helpful. My second question is regarding the conversion period and the preopening expenses, for 2013, what is the preopening expenses do you expect? And also for the conversion period of the hotels, do you see any change or is it like -- remains the same?

Eric Haibing Wu

Well, in 2012, the total annual preopening expenses is approximately RMB62 million for the 81 hotels that we -- in relation to the 81 hotels we opened. As we're cutting down our target number of new leased-and-operated hotels to 50, we expect the preopening expenses will decrease accordingly, will decrease accordingly.

And the overall conversion period, there hasn't been significant change in the overall conversion period last year. It's roughly five months -- five months conversion period.

Long Lin – Brean Capital

Thank you very much. That's all my questions.

Operator

That concludes Q&A, so I'll now hand back to Ms. Chen for closing remarks.

Vivian Chen

Okay. Thank you, everyone, for joining us today. And we look forward to updating you on our recent business developments.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: 7 Days Group Holdings' CEO Discusses Q4 2012 Results - Earnings Call Transcript
This Transcript
All Transcripts