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Home Inns & Hotels Management Inc. (NASDAQ:HMIN)

Q4 2012 Earnings Call

March 11, 2013 9:00 PM ET

Executives

Johnny Wang – Director, IR

David Sun – CEO

Huiping Yan – CFO

Analysts

Ella Ji – Oppenheimer

Justin Kwok – Goldman Sachs

Lin He – Morgan Stanley

Billy Ng – Bank of America Merrill Lynch

Jamie Zhou – Macquarie

Fawne Jiang – Brean Capital

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Home Inns Group’s Fourth Quarter and Full Year 2012 Earnings Conference Call. At this time, all participants are in a 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, Johnny Wang, Home Inns Group’s Investor Relations Director. Please go ahead.

Johnny Wang

Thank you, DJ. Hello, everybody and welcome to our earnings conference call. Our fourth quarter and full year 2012 earnings results were released earlier and are available on the company’s website. In addition, we have posted a slide show presentation on our website under the event calendar webpage, which you can download and use to follow along with today’s call.

With us today is David Sun, our Chief Executive Officer; and Huiping Yan, our Chief Financial Officer, who will be discussing our performance for the past quarter and full year. After the 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 U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks, 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 statement except as required under applicable law. As a reminder, this conference is being recorded.

In additional the webcast of this conference call will be available on Home Inns group’s Investor Relations website at english.homeinns.com. With that, I will now turn the call over to our CEO, David Sun.

David Sun

Thanks, Johnny. Hello, everyone, and thank you for joining us today to discuss our fourth quarter and the full year 2012 results. Despite the continued weakness in economy and the rising operation costs, the company delivered a solid performance and achieved important milestone in the fourth quarter and in the full year of 2012. We exceed our unit growth target of 330 to 360 new hotels opening for the year, driven by strong growth from franchised-and-managed hotels.

We achieved our overall revenue growth target with strong performance by mature hotels. We made further operating improvements through the integration of Motel 168 portfolio in the fourth quarter and achieved 9.7% increase in RevPAR year-over-year. We finalized planning of Yitel hotel including design specification, return of investment framework and a prudent expansion plan.

We benefit from the cost control initiatives implemented in early part of the year and saw meaningful cost productivity gains on the hotel personnel cost as well as on corporate G&A expense.

At times of market challenges, the company rely on its solid business fundamentals and the management disciplines to focus our execution of some business strategies. We are well prepared to embark on a new era of sustainable, profitable growth to capture the long-term perspective of Chinese economy.

Turning to more specifics, let us first look at our financial results. Total revenues increased 11.9% year-over-year to RMB 1.47 billion for the fourth quarter and increased 45.7% to RMB 5.77 billion for the full year of 2012. This was within our guidance range of RMB 5.72 billion to RMB 5.81 billion. RevPAR for the core business of Home Inns and Yitel Hotels was RMB 143 in the fourth quarter compared to RMB 153 in the same period of 2011. While the occupancy rate for this group of hotels was still resilient at 85.6% in the fourth quarter compared to 88.4% last year.

ADR was down at RMB 166 to RMB 173 in the fourth quarter of 2011. The decline was mainly due to the relatively slower ramp up progress by the hotels located in the low tier cities before they reach maturity. Markets in low tier cities that there will be less developed experience, more challenges during the overall soft economy, whilst reaching maturity. However, hotel in low-tier cities are able to maintain steady performance. There are 919 core Home Inns hotels that were in operation for at least 18 months phase during the fourth quarter of 2012. They were able to maintain a flat ADR at RMB 172 year-on-year in the fourth quarter of 2012 while holding a high occupancy rate of 90.4%, down only 1.1 percentage points from 91.5% in the same period of 2011. We continue to see positive trend of improvements at Motel 168.

In the fourth quarter of 2012, Motel 168 increased RevPAR by RMB 11 year-over-year to RMB 124 as a result of improvements in both occupancy rate and ADR. For the fourth quarter and in full year of 2012, the increasing – the increase in room revenues were offset by a sharp decrease in food and beverages, given our concentrated efforts to eliminate large scale and the non-profitable restaurant operations.

Food and beverage revenues will be maintained at current level of around 4% of total revenues going forward. Even so, total revenues from Motel 168 were slightly below expectations for the year. We are pleased with the momentous improvements. We expect further RevPAR expansions in the final stage of integration in 2013, particularly benefiting from the conversion to dual-branding operations at large scale Motel 168 locations.

The cumulative results for the complete conversion so far have shown double-digit improvements in the combined RevPAR. The company passed for a total of approximately 30 of these dual-brand operations to gradually come align by the end of the second quarter of 2013 in time to take advantage of favorable seasonality. Some of these conversions were included operations under the Yitel brand given the suitable property requirements and local marketing condition.

Speaking about Yitel hotel. At the end of 2012, we had a total of seven Yitel hotels, eight operation including one and a franchise model. After extensive research design fine tune and further revisions based on actual result of execution, we have complete fundamental design work of Yitel brand taking into the consideration of the market potential.

Capital requirements at profitability impact. We have also carefully rule out the prudent expansion plan focusing on quality. We plan to open another 8 to 10 Yitel hotels in 2013 including four to five locations beyond the dual-branding convention of existing Motel 168 locations.

Variance of Yitel portfolio in five years will contain a healthy mix of finished models utilize our core competencies of chain hotels management without relying a large capital investment.

The mix shift towards non-capital high margin franchise business model has already taken place at our economy brands. By the second quarter of 2012, the total number of franchise and management hotels surprised at the leased-and-operated hotels by the first time in our growth histories. At the end of the year, about 55% of our hotels were franchised based and 170 out of total of 241 hotels pipeline for 100 – for 2013 were franchised and managed contracts.

It is worth emphasizing that all of this does not happen overnight. We spent years to cultivate strong alliance with our franchise partners to gain their trust with our operational philosophy and proven execution.

We mean they are loyalty with increasing value of our brands. Prospective their investment with strength and quality control framework. We have one of the best-run franchised and managed hotels program and we intend to capitalize on this competitive advantage to support our further growth.

So let’s now talk about new hotels development. For the full year of 2012, we exceed our new hotel opening guidance and opened 366 new hotels, adding 109 new leased-and-operated hotels and 257 new franchised-and-managed hotels.

Our new hotels opening schedule was normal at the basis of our robust pipeline at the end of 2012. We expect to maintain a similar level of new hotels opening and open 360 to 380 new hotels in 2013 including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels.

Meanwhile, we will continue to active manage our frequent guest program to maintain the consistent revenue base. As of December 31, 2012, our frequent guests program had a record high of 11.9 million unique active non-corporate members, up from 10.6 million as of September 30, 2012. The contribution from the members is always above 50%.

Moving into 2013, we are hopeful that the economy will improve and we are equally aware that meaningful improvements may still be a few months away. Nevertheless, we believe that Home Inns Group have the right strategies and a strong base fundamentals to capture growth opportunity and to deliver a continued long-term success.

Our focus remain our sustainable profitable growth, achieve balance – achieving balance in top line growth as well as margin expansion. We are well positioned to achieve this goal even the following. One, return of the normal market condition so that we can and increase price consistently to offset rising cost. Two, well established and a stable low price – lower-tier positioning to capture the growth prospects.

Three, as high as 80% to 85% of new – of our new hotels under the franchised-and-managed model operating our proven operational framework. Four, the successful conclusion of Motel 168 integration and further demand of this brand to increasing our existing market penetration. Five, a sensible pace of expanding into mid-scale marketing, we strengthened Yitel brand. And six, continue cost control and productivity focus to achieve leverage and economies of scale as we grow.

We strongly believe that recovery in the Chinese economy is not a matter of is but when. The company is well prepared to take advantage of this recovery when it arrives. We are excited about years ahead as Home Inns group maintains its leadership position in the China economic hotel sector and the delivery long-term value for our shareholders. With that, let me turn the call over to Huiping who will walk us through the financials for fourth quarter and full year of 2012. Huiping?

Huiping Yan

Thank you, David. And hello to everyone on the call. I’m pleased to first discuss our fourth quarter and full year 2012 results and then provide our guidance for the first quarter and full year of 2013. As a reminder, the company has consolidated Motel 168’s operation and financial results since October 1, 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 spread sheets 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 selective non-Motel 168 information to provide more context. As I take you through the numbers, please note that I will only speak in RMB terms unless specifically mentioned.

We delivered steady revenue growth in the fourth quarter and our group revenues were in line with our annual target. For the fourth quarter, total revenues for Home Inns Group were RMB 1.47 billion increasing 11.9% year-over-year. Excluding Motel 168, total revenues for the fourth quarter were RMB 1.1 billion, an increase of 16.8% year-over-year.

For the full year, total revenues for Home Inns Group were RMB 5.77 billion increasing 45.7% year-over-year. Excluding Motel 168, total revenues for the full year were RMB 4.3 billion, an increase of 19.7% year-over-year. The increase in revenues were mainly volume-driven from the increased in the number of hotels in operation.

Total revenues for leased-and-operated hotels for the fourth quarter were RMB 1.3 billion representing a 10.5% increase year-over-year. Excluding Motel 168, total revenues from leased-and-operated hotels for the fourth quarter were RMB 959.7 million, an increase of 15.7% year-over-year.

For the full year 2012, total revenues from leased-and-operated hotels were RMB 5.16 billion, representing a 45.1% increase year-over-year. Excluding Motel 168, total revenues from leased-and-operated hotels for the full year were RMB 3.77 billion, an increase of 17.4% year-over-year.

Total revenues from franchised-and-managed hotels for the fourth quarter were RMB 160.7 million, representing a 24.8% increase year-over-year. Excluding Motel 168, total revenues from franchised-and-managed hotels for the fourth quarter were RMB 140.9 million, an increase of 25.3% year-over-year.

For the full year of 2012, total revenues from franchised and managed hotels were RMB 604.9 million, representing a 51.2% year-over-year. Excluding Motel 168, total revenues from franchised and managed hotels for the full year were RMB 534.1 million, an increase of 39.2% year-over-year.

Again, as mentioned, the increase in revenues were volume-driven and further, as David discussed earlier, even though we experienced slower hotel ramp up towards maturity in relatively weaker markets, our mature hotel group demonstrated resilience in top line performance and supported the group’s achievement on its overall revenue target.

Total operating cost and expenses were RMB 1.34 billion for the fourth quarter. Excluding share-based compensation expenses and integration cost, total operating cost and expenses for the quarter were RMB 1.3 million, representing 88.6% of total revenues compared to 87.8% in the same period of last year.

For the full year of 2012, total operating costs and expenses were RMB 5.16 billion. Excluding any share-based compensation expenses and integration costs, total operating costs and expenses for the full year were RMB 4.97 billion representing 86.1% of total revenues compared to 82.2% in 2011. The increase in total operating costs and expenses as a percentage of total revenues for the fourth quarter and the full year of 2012 were mainly due to overall soft market conditions plus our systematic price increases and rising operating costs net of cost productivity gains on hotel personnel costs and corporate G&A.

The increase in this ratio for the full year was also driven by a higher cost ratio from Motel 168 with one quarter of results consolidated in 2011 compared to four quarters of results consolidated in 2012. Total leased and operated hotel costs excluding share-based compensation and integration costs for the fourth quarter were RMB 1.19 billion representing 91.0% of leased and operated hotel revenues compared to 88.9% of leased and operated hotel revenues in the same period of 2011.

For the full year of 2012, total leased and operated hotel costs excluding share-based compensation expenses and integration costs were RMB 4.55 billion representing 88.1% of leased and operated hotel revenues compared to 82.7% of the leased and operated hotel revenues in 2011.

The year-over-year increase in this ratio for the fourth quarter and full year of 2012 were largely due to recurring revenue base due to market softness, the absence of systematic price increases, rising operating cost including energy and personnel cost not fully absorbed by productivity initiative. A year-over-year increase in this expenses ratio for the full year was also driven by a higher cost ratio from Motel 168. These results were consolidated starting fourth quarter of 2011.

Excluding share-based compensation expenses, labor cost of leased-and-operated hotels increased 9.2% which is below the growth rate of leased-and-operated hotel revenue growth in the fourth quarter. The labor cost productivity programs implemented in early part of 2012 is generating positive result.

Excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels for the fourth quarter were RMB 22.1 million or 13.8% of franchised-and-managed hotel revenues. This compared to 14.3% for the same quarter in 2011.

For the full year of 2012, excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels were 11 – RMB 115.5 million or 19.1% of franchised-and-managed hotel revenues compared to 17.2% in 2011. The increase in personnel cost of franchised-and-management hotels were in line with the increase in the number of franchised-and-managed hotels.

Excluding share-based compensation expenses, sales and marketing expenses for the fourth quarter of 2012 were RMB 24.4 million representing 1.7% of total revenues compared to 1.5% of total revenues in the same period of 2011 and 1.1% of total revenues in the third quarter of 2012.

In this expense ratio was mainly due to higher non-recurring spending on marketing programs in the quarter to support Home Inns multi-brand strategy. The company continued to rely largely on effective but simple sales and marketing practices to support its revenue growth.

For the full year of 2012, excluding share-based compensation expenses and integration costs, sales and marketing expenses were RMB 75.3 million representing 1.3% of total revenues compared to 1.3% of total revenues in 2011 excluding the one-time adjustment due to change in accounting estimates. In other words, the sales and marketing expenses for the company continue to be managed and controlled.

General and administrative expenses excluding share-based compensation expenses and integration cost was RMB 65.2 million or 4.5% of total revenues compared to 4.7% of the total revenues in the same period 2011. For the full year, general and administrative expenses excluding share-based compensation expenses and integration costs was RMB 228 million or 4% of total revenues compared to 5% in 2011.

The year-over-year decrease in this expense ratio in the fourth quarter and full year came as a result of effective cost control and productivity enhancement. The company continues to benefit from discipline and economies of scale.

All discussed above resulted in an income from operations excluding share-based compensation expenses and integration cost for the fourth quarter of 2012 of RMB 79.2 million or 5.4% of total revenue compared to RMB 78.5 million or 6% of total revenue in the same period 2011 and RMB 204.7 million or 12.8% of total revenue in the third quarter of 2012.

For the full year of 2012, income from operations excluding share-based compensation expenses and integration cost was RMB 464.1 million or 8% of total revenue compared to RMB 457.3 million or 11.5% of total revenues in 2011.

Provided that the market condition improve in the future the company is prepared to improve further profitability to price restoration, price increases systematically, further productivity gain and margin lift with increased portfolio mix towards franchised-and-managed hotels.

Adjusted EBITDA for the fourth quarter of 2012 was RMB 260.5 million or 17.8% of total revenues compared to RMB 227.4 million or 17.4% of total revenue in the same period of 2011. For the full year 2012, adjusted EBITDA was RMB 1.13 billion or 19.6% of total revenue compared to RMB 900.2 million or 22.7% of total revenues in 2011. Adjusted net income attributable to Home Inns Group shareholders was RMB 80.6 million for the fourth quarter of 2012 compared to RMB 36.6 million in the same period of 2011. And the adjusted net income of RMB 135.8 million in the third quarter of 2012. Adjusted diluted earnings per ADS for the fourth quarter were RMB 1.74 or $0.27.

For the full year of 2012, adjusted net income attributable to Home Inns shareholders were RMB 300.3 million for the full year compared to adjusted net income of RMB 326.1 million in 2011. Adjusted diluted earnings per ADS for the full year were RMB 6.62 or $1.06. Both adjusted income from operations and adjusted EBITDA as a percentage of total revenue decreased slightly year-over-year, which is consistent with market conditions not suitable for systematic price increases which could then offset rising operating costs.

During the fourth quarter, the company generated a net operating cash flow of RMB 186.8 million compared to RMB 139.5 million in the same quarter of 2011. Capitalized expenditures for the fourth quarter of 2012 were RMB 250.4 million while related cash paid for capital expenses during the quarter was RMB 305.6 million.

For the full year 2012 net operating cash flow was RMB 716.9 million compared to RMB 726.1 million in 2011. Capitalized expenditures for 2012 were RMB 1 billion while related cash paid for capital expenditures during the year was RMB 958.1 million.

As of the end of 2012, Home Inns Group had cash and cash equivalent of RMB 663.2 million. Financial liabilities of RMB 1.07 billion consisted of the outstanding balance of long-term financial liabilities for convertible notes issued in 2010 December, and interest swap contracts both measured at fair value.

The balance of U.S. dollar denominated four-year term loan facility was RMB 748 million. The company redeemed the outstanding convertible bonds issued in 2007 in the fourth quarter of 2012 and reduced its term loan balance ahead of the required pay down schedule.

With strong cash generated underlying operation in a stable capital commitments planned for leased and operated hotels at a reduced number, the company expect to self fund future expansion and continue to reduce debt load.

Turning to our outlook, as David mentioned earlier, we are hopeful that a market recovery will happen even though it may still be months ahead. We will remain focused on profitable expansion and rely on our internal readiness to take advantage of the market recovery and capture long-term opportunities in Chinese economy and the travel and lodging industry.

With respect to our expectations for the year. We plan to open 360 to 380 new hotels in 2013 including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels.

Total revenues for Home Inns Group for 2013 are expected to be in the range of RMB 6,600 million to RMB 6,800 million representing a growth of 14.4% to 17.9% over 2012. Total revenue for the group in the first quarter of 2013 are expected to be in the range of RMB 1,385 million to RMB 1,415 million.

Total revenues from Motel 168 brand for 2013 are expected to be in the range of RMB 1,650 million to RMB 1,700 million. Total revenues for Motel 168 brand in the first quarter are expected to be in the range of RMB 330 million to RMB 340 million.

Excluding Motel 168, total revenues for 2013 are expected to be in the range of RMB 4,950 million to RMB 5,100 million. Excluding Motel 168, total revenues in the first quarter of 2013 are expected to be in the range of RMB 1,055 million to RMB 1,075 million. Please note that above forecasts reflect the company’s current and preliminary view which are subject to change.

We have covered a great deal of territory today, so before I open the call for questions, I think it’s worth taking a moment to summarize key takeaways for 2012. Our performance in the year are reasonably satisfactory given market conditions. We met our annual revenue expectation and exceeded our targets for new hotel openings. We focused on profitable growth within optimal new hotel opening schedule and diversification in business model.

Our mature hotels remained resilient and delivered solid performance given a soft environment. Motel 168 integration is well on track and we expect to conclude the integration in 2013. We placed a heavy emphasis on franchised and managed hotel growth to minimize investment and maximize profitability in a challenging market.

Our cost control and productivity measures generated positive impact to protect margin despite limited pricing opportunities. In short, in 2013, we will continue to focus on further developing our low-capital, high-margin franchise business, complete Motel 169 integration, scale up our Yitel profitability and continue effective cost control initiative.

We are excited about the long-term opportunities before us and we are confident that the underlying fundamentals of our business are stronger than ever. It will support and maintain our clear market leadership position well into the future and will enable us to deliver enhanced shareholder value over the long term.

This concludes our prepared remarks. And now, let’s open the line for questions. Operator, please.

Question-and-Answer Session

Operator

Ladies and gentlemen, we will now begin the question-and-answer session. (Operator Instructions) In the interest of time, we ask that you limit yourself to one question with one follow-up question at a time. (Operator Instructions) Your first question comes from the line of Ella Ji of Oppenheimer. Please go ahead.

Ella Ji – Oppenheimer

Good morning, David, Huiping and Johnny. Thank you for taking my questions. First of all, could you tell us how many Motel 168 hotels do you plan to open in 2013? How many of – within that how many are leased-and-operated?

Huiping Yan

The total hotels we plan to open for Motel 168 is around 80 in total. And about half or so will be leased-and-operated and half will be franchised. And also, if I may further comment that these hotels will be largely opened in markets that we’ve already established presence with the Home Inns brand.

Ella Ji – Oppenheimer

Could you give a little bit more details of the thoughts behind that strategy?

Huiping Yan

Sure, sure. As we have briefly discussed in our previous earnings call that we are looking at our hotel portfolio strategy in times of the development in the marketplace. As you know, that we have went into the lower tier city earlier compared to our peers and the current portfolio mix or spread geographically is relatively stable and we intend to keep that way. So, new hotels – new market openings will be on a selective and controlled basis to ensure quality of the location as well as profitability.

Motel 168 after it’s fully integrated into the total operating platforms for the economy brand, we believe that it could well leverage the overall operating platform and further its brand expansion. And that is why we believe that a penetration into the existing market where a second brand could capture a greater segment of the underlying customer base is the strategy to go with.

Ella Ji – Oppenheimer

Yes. Okay. Got it. And then, if I can sneak in one more. So, I see that in 4Q, your more mature hotels’ RevPAR comp was a negative 1.3% although micro economy sort of bottomed out already in 3Q. Now, I know that your industry is kind of a lagging industry comparing to the micro, so could you comment on the expectation of mature hotels RevPAR comp in Q1 2013? Yes, any detailed source behind that would be very helpful. Thank you.

Huiping Yan

Yes. Yes. Thank you for your question. As you well put, the first – the third quarter and the fourth quarter, we have seen positive signs in improvements in certain economic indicators as you said that our business does have a lagging effect as the market recovers, and particularly so with respect to Home Inns, we have a very geographically diverse portfolio. So, as the overall market is, indeed, still experiencing softness and without meaningful recovery, our exposure is still linked to the market softness.

For matured hotels, we had described that it is still resilient. The ADR was kept flat at RMB 172, while the occupancy rate was slightly down to 90.4%. But still, it’s a high occupancy rate given the market environment. So, we believe that going forward, as the market gradually recovers, the matured hotels will continue to perform stable – with stable results, and particularly so in Q1, what we have seen so far is that the market remains flattish. We do expect, however, the improvement from Motel 168 portfolio, as well as the continued improvements in – or I should say, continued ramping up of Yitel Hotels, we believe that total matured group will be steady and healthy in terms of RevPAR trend.

Ella Ji – Oppenheimer

Got it. That’s very helpful. Thank you. I will get back to the queue.

Huiping Yan

Thank you.

Operator

Your next question comes from the line of Justin Kwok of Goldman Sachs. Please go ahead.

Justin Kwok – Goldman Sachs

Morning. Thanks for taking my question. My question is focusing on the group’s margins in 2013. I guess that you mentioned a bit on different cost and revenue drivers. Do you mind to give us some guidance on the margins, drivers, and how you’re seeing the year-over-year change for the group’s margin into 2013 taking into account of the motel improvement, some of the cost drivers and also on the same store RevPAR year-over-year trend? Thank you.

Huiping Yan

Sure. To briefly put the systematic price increases typically year-over-year even though at mid to low single digit is well sufficient to cover our cost increases. So, under a normal market environment, our total matured group of hotels margin should be flat year-over-year and then the improvement from new hotels in the prior – or maturing hotels, as we typically call it, for those hotels that, before reaching maturity, should contribute positively to the margin improvement. And as we discussed that during soft marketplaces and especially with a higher concentration of maturing hotels in the softer market, for example, lower tier cities, we have experienced slower than normal ramp-up.

So what we hope for is, in 2013, as the market recovers and also as our ramp-up concludes, the significant portion of our new and maturing hotels will start contributing positively to the bottom line. What we have seen that in just simply the margin pressure that we experienced in 2012 about 4 points or so is relative to the overall market environment. No price increases and also rise in costs. So all of these four points are likely to go away once we start looking into 2013 and 2014 and onward. So directionally, we are expecting the revenue contribution to be fully in place and the cost structure to be stable and hence margin improved. Separately of course, we have talked about the mix shift towards franchise hotels and that should also help the improvements on the bottom line and typically about 50 to 75 bps a year with the current pace.

And then also thirdly, perhaps is not necessarily material at this point that Yitel improvement in its portfolio as it ramps us and as further, of course, last not the least, Motel 168 improvement on its top line revenue growth with a stabilized cost structure we expect to see margin improvement overall.

Justin Kwok – Goldman Sachs

Thanks, very clear. But just on – a follow-up on your comment for the full year revenue side in 2013 for that, 14.5% to 18% growth, how should we look at these growth through the volume side and also on the room rate’s growth side? Is there a need – you put in to the full year forecast. Thanks.

Huiping Yan

Sure. For 2013, given that we have the current expectation of the slow to come market recovery and potentially as early as – starting of the second half of 2013, we put a level of prudence in our pricing assumptions. And the large part of the volume increases will be contributing to our revenue increase.

Justin Kwok – Goldman Sachs

Thank you.

Operator

Your next question comes from the line of Lin He of Morgan Stanley. Please go ahead.

Lin He – Morgan Stanley

Good morning, David, Huiping and Johnny, thanks for taking the question. I have a question on the – hi, Huiping. I have a question on the EBITDA margin of Motel 168. We have seen a nice increase in RevPAR from motel, but in 4Q, on a year-over-year basis, it seems like adjusted EBITDA declined on year-over-year basis. And so, could you please provide some more color on that and also what’s the margin outlook for Motel 168 et cetera? Thank you.

Huiping Yan

Sure, thank you, Lin, for the question. The margin – adjusted EBITDA for Motel 168 in 2011 was 10.8% and in 2012 for the fourth quarter was 7.2%. And these changes were largely due to a softer market. There isn’t a significant change in the underlying business operations except for its top line improvement.

With this change, is slightly cost adjustments that we’ve done on Motel 168 side. For example, the labor costs at Motel 168, when we first took over the labor cost structure were on a different scheme as Home Inns’ total group. So what we have to do is after stabilizing of the labor force, make alignment for the personnel costs including KPI programs establishment as well as bonus accrual for performance-driven reward. And these were part of the labor cost increases. Separately, we also added compliance-related structures including internal control, including quality control to a Motel 168 operating platform to bring up the level of proficiency as a public company requires. So, these added costs are reflected in the adjusted EBITDA margin.

Going forward, again as Motel 168 improves, continue the improvements on its top line with a stabilized cost structure margin should continue to improve.

Lin He – Morgan Stanley

Sure, do you have specific EBITDA margin guidance for Motel 168 like the ones you provided before?

Huiping Yan

We don’t provide specific margin guidance. We’ve indicated from a trend basis the direction of where the margins would go. We think that Motel 168 for the full year achieved adjusted EBITDA margin of 10.2% and as I indicated earlier when – to Justin’s call, that when market resume the price pressure will be relieved to where Motel 168 will enjoy the same level of price restoration and adjustment on a top line in addition to its operating performance improvement as we conclude integration.

So, the margin improvement should be relatively similar to that of Home Inns for its underlying operation. And on top of that improvement from its additional integration results.

Lin He – Morgan Stanley

Sure. That’s very helpful. Thanks, Huiping.

Huiping Yan

Thank you.

Operator

Your next question comes from the line of Billy Ng of Bank of America Merrill Lynch. Please go ahead.

Billy Ng – Bank of America Merrill Lynch

Hi. Good morning. Just a follow-up questions on your revenue guidance. Basically, I guess you have provide some colors, but can you tell us a little bit more about your growth rate assumptions and in terms of your room rates and occupancy and also how do you look at the mature hotel in 2013 when you come up with your revenue guidance?

Huiping Yan

Sure. Again, we had mentioned that the main driver for the revenue growth will be related to the unit improvement or volume improvement. And if you further note that because the franchised hotels are a fee-based revenue force. So as we increased units, the revenue improvement from the franchised side will be lesser in terms of – as it compared to the unit growth.

However, with that said, we are expecting for the matured group to hold at least flat and also as market presents an improvement on its RevPAR for 2013 and particularly profitable in the second half. And therefore, the overall revenue growth will be supported by volume and a potential opportunity from price.

Billy Ng – Bank of America Merrill Lynch

Just to follow-up on that because like if I understand correctly so like you say the mature hotel probably the assumption is about flat. Does that mean we will see negative growth in the first half and then positive growth in the second half because you do suggest that the second half of the year, we should see some improvement in terms of the trend?

Huiping Yan

I think the overall performance in Q1 and Q2 of 2013, as it compare to 2012 where we experienced market softness, will be somewhat flattish. We don’t take into consideration any price adjustment. And any price improvements in the first half of the year will largely be seasonally driven. In other words, after the Chinese New Year, we typically restore prices to the level of before the holiday. And so therefore, the year-over-year RevPAR performance is expect to be somewhat flattish for the first half. As market recovers in the second half, we believe there might be opportunities for systematic price increases in addition to the opportune prices that we typically sought after – typically sought after in dealing events and also seasonality that are favorable to us. So therefore, the second half of the year will be a potential positive year-over-year.

Billy Ng – Bank of America Merrill Lynch

I see. Just to clarify that. So like we – right now, it has not been include in your revenue guidance if there is a potential improvement in the second half, right?

Huiping Yan

We have considered a reduced probability of full price – systematic price increases. So specifically in other words, our assumption for the second half of the year is that likelihood of price increases will be above 60% but that will only be a partial year. So, therefore, it’s not the full typical 3% to 5% increases that we expect. That is the limited assumption on price that I was referring to earlier.

Billy Ng – Bank of America Merrill Lynch

Okay. Thanks a lot. Thanks.

Huiping Yan

Sure. Thank you.

Operator

Your next question comes from the line of Jamie Zhou of Macquarie. Please go ahead.

Jamie Zhou – Macquarie

Hello, good morning, Huiping, David and Johnny. Thanks for taking my questions. My first question is a follow-up to the Motel 168 revenue guidance. So we were able to achieve a very strong recovery in the occupancy rate in FY 2012. Heading into FY 2013, could you help us just clarify what are we looking internally at our ADR increase and with the occupancy levels for the full year? Thanks. That’s my first question.

Huiping Yan

Sure. Thank you, Jamie, for your question. Motel 168 performance in 2012 were largely driven by the initial integration effort plus the second part where we implemented the consolidation of economy of hotels operations to where execution effectiveness would be improved. Motel 168 initial target for 2012, the occupancy rate was 80% to 85% and we came in at slightly below that 78% for the full year. And that is still a satisfactory result given the soft market environment.

In 2013, with the dual brand conversion underway as well as further improvements on the overall portfolio, we believe the 80% to 85% target would still be met in 2013 as we conclude the Motel 168 integration. The occupancy and ADR will continue to rise. As you can see compared to Home Inns, the occupancy rate and ADR gap between Home Inns’ and Motel 168’s performance are narrowing or has been narrowing and we target to continue to do so. At time of conclusion of the integration, Motel 168 should be at 80% to 85% occupancy rate and a RMB 135 RevPAR level, and that was our target for the integration and right now we see it to be on track to be achieved.

Jamie Zhou – Macquarie

Okay. Thank you. Now, do you have a specific target for FY 2013 in terms of RevPAR – sorry – for ADR and occupancy breakdown for Motel 168?

Huiping Yan

Again, we look at the overall RevPAR for Motel 168. It will be at a 8% to 10% improvement at minimum.

Jamie Zhou – Macquarie

For FY 2013?

Huiping Yan

Right. The ADR and occupancy rate is, of course, what we continue to push for. The initial leading factor is the ADR – I’m sorry – is the occupancy rate improvement as we build the portfolio, build the customer base and then ADR will follow. That was what we have achieved in the past. The ADR compared to Home Inns from Motel 168 at a comparable location should be similar.

Particularly for order portfolio of Motel 168, it should be similar to the Home Inns. The new locations and also under the new design of the Motel 168, the location should command a slightly higher ADR as the design and look and feel is more than nice than that of Home Inns, so the ADR will be slightly higher. As we add about total of 80 new Motel hotels, 40 of which would be leased and operated. The lease by new Motel 168 hotels in the ADR will gradually come. It wouldn’t be immediate.

Jamie Zhou – Macquarie

Okay, great. Thanks. That’s helpful. My second question actually is to clarify something David said earlier in the call before. If I heard it correctly, we are planning to add 8 to 10 Yitel hotels this year, which will include four to five new branded with large motels, is that correct?

Huiping Yan

That’s correct. That’s correct. While we are looking through the large scale operations at Motel 168 based on the property conditions, location, and as well as the local market environment, we have selected four or five of those locations that are suitable for Yitel operation and that will be part of the deal brand conversion.

And in addition to that, we also have visibility to the pipeline for Yitel with a organic, if you will, growth of new Yitel openings. And then also, further, various business models will be deployed earlier compared to our history of Home Inns in introducing the franchise hotel leader. We will utilize either franchise model, management contract model or simply the brand – use of our brand to expand Yitel portfolio.

Jamie Zhou – Macquarie

I see. Huiping could you further elaborate on the dual-branded of motel with Yitel given that those two branches have very different price points.

Huiping Yan

Sure and actually it creates a different situation as the dual brand with the two economy brand. Again, those are possible given by a relatively market-driven or demand-driven environment in China. The property and also the buildings that we are evaluating in those options for dual-brand operation for Yitel and Motel 168 are suitable to where for example there are single standing phases of the property and also the contrast in the product will capture the local market which we have done extensive research on.

So, we believe that the Motel 168 and Yitel dual-branded operations will in fact utilize the access space much more effectively.

Jamie Zhou – Macquarie

Okay. Great, understood. Thank you very much for taking my questions.

Huiping Yan

Sure, thank you Jamie.

Operator

Your next question comes from the line of Fawne Jiang of Brean Capital. Please go ahead.

Fawne Jiang – Brean Capital

Good morning. Thank you for taking my questions. I do have a few quick housekeeping items. Just wonder what’s your pre-opening costs in 4Q and which level of pre-opening costs should we expect for 2013?

Huiping Yan

Sure. The pre-opening costs for the 4Q was RMB 26.8 million and for the full year was RMB 104.2 million. And for 2013, with the inclusion of Yitel opening yet a reduced year operated hotels to 80 from the previous over 100, we think that pre-opening expenses will be flattish or similar.

Fawne Jiang – Brean Capital

Got it. Thanks, Huiping. Second question session regarding your integration costs. Just wonder how much more integration costs should we expect from the coming quarters? And specifically first quarter.

Huiping Yan

Sure. A very good question. And the onset of Motel 160 acquisition, we set a target or budget of $20 million to $25 million for integration cost. With the dual branded conversion costs, we were still coming within that budget. In 2011, we saw in the P&L impact of integration cost of $19.5 million and for – I’m sorry, for 2011 and therefore 2012, we saw a RMB 89 million, a little over RMB 89 million P&L impact of the integration costs.

And these are reflected P&L impact in the – in our – those are expenses in the P&L. For 2013 and onwards, there will be a roughly about RMB 11 million or so of integration cost as currently estimated it largely relates to the dual-brand conversion cost.

And then trickle through for the rest of three or four years, we will be integration charges to the P&L given by some of the capitalized integration expenses coming through as depreciation and cost. But however, from a cash perspective, 2013 would be the year we conclude the spending of integration budget.

Right now, what we are seeing, it will come in somewhere around RMB 23 million and RMB 24 million – I’m sorry, USD. I hope that answers your question on...

Fawne Jiang – Brean Capital

Yes, that’s very helpful. Thanks, Huiping.

Huiping Yan

Sure, thank you and good evening.

Operator

Confirming there are no further questions in queue, I’d like to hand the conference back to the presenters. Please continue.

Huiping Yan

Thank you again everybody for your participation in our call and we have received very good questions and also very well-prepared and insightful questions. We will look forward to discuss with your our business strategy and our new growth initiative in 2013 and onwards. And thank you again for your time.

Have a good evening or good morning.

Johnny Wang

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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