Home Inns Q1 2009 Earnings Call Transcript

Home Inns & Hotels Management Inc. (HMIN)

Q1 2009 Earnings Call

May 7, 2009 9:00 pm ET

Executives

Ethan Ruan - Investor Relations Manager

David Sun - Chief Executive Officer, Director

May Wu - Chief Financial Officer

Analysts

Paul King - Oppenheimer

Chris Woronka - Deutsche Bank

Hao Hung - Brean Murray, Carret & Co.

Marisa Ho - Credit Suisse

Cici Lam - Citigroup

Robert Zu - Analyst

Jeff Hu - Grand River Investments

Presentation

Operator

Hello and thank you for standing by for Home Inns first quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Mr. Ethan Ruan, Home Inns' Investor Relations Manager. Please proceed, sir.

Ethan Ruan

Hello, everyone and thank you for your patience and welcome to our first quarter 2009 earnings conference call. Our first quarter earnings results were released earlier and are available on the company’s website. With us today are David Sun, our Chief Executive Officer; and May Wu, Chief Financial Officer, who will be discussing our performance for the past quarter. After their remarks, David and May 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 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 does not undertake any obligation to update any forward-looking statements except as required under applicable law.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Home Inns' investor relations website at English.homeinns.com.

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

David Sun

Hello, everyone and thank you for joining us today to discuss our performance during the first quarter. As you all know, this is a seasonally slow quarter for us due to the Chinese New Year holidays, and this year travel activities were further reduced by a slower economy, resulting in an especially challenging quarter for us. With that in mind, let me give you some additional color on our operational performance during the quarter.

Our chain wide REVPAR for the quarter was 130 compared with 140 a year ago, a 7% decline. The majority of this decline is attributable to a low ADR or average daily rate across our hotel chain. I would like to emphasize that part of this ADR decline is expected each quarter as we continue to expand into low tier cities where room rates are lower. However, this quarter the [inaudible] of the additional economic impact on our hotels can be seen.

If we look at the performance of our established hotels, for hotels that were open more than 18 months, REVPAR was down over 8% from 157 a year ago to 153 during the first quarter this year. These hotels experiencing decline in both occupancy and ADR, each [inaudible] contributing roughly half of the REVPAR impact.

Part of the ADR decline was due to a chain-wide promotion we run throughout the quarter. The promotional program allowed repeat customers to apply certain room vouchers only during the quarter towards additional stay until the end of March. That effectively brings down average room rates when the vouchers are redeemed. The [inaudible] this program in an effort to [boost] occupancy during the seasonally and economically slow time, and to show an understanding and support to our customers who are also facing challenged business environment.

We believe such a gesture is appreciated by our customers, many of whom are extremely [lower] customer of ours. As of the end of the quarter, we have over 1.4 million active Home Inns members. Our members contribute 52% of our room nights in the first quarter.

While revenue exceeded expectation, we did experience margin pressure due to lower REVPAR, given that our cost at the hotel level are largely fixed. This leads to an adjusted operating loss of about $9 million. An important fact that attributed to this loss is a high depreciation and amortization to revenue ratio. As our hotel and per room convention capital spending is about the same across geographic locations. While REVPAR is lower, the ratio of depreciation becomes higher. Even without seasonal and economic impact, we have expected this due to our planned expansion into low tier cities. This factor, however, has no impact on our EBITDA and operating cash flow. Our adjusted EBITDA increased almost 50% year over year and our operating cash flow was over $50 million for the quarter.

I believe it is worth repeating here that while growth into small cities thus result in low REVPAR and initiated a high cost ratio we see. This is a necessary strategy of our long-term model. We also believe the near-term impact will be gradually eliminated as the size and wealth of the small cities increases.

To provide some context in regard to our classification of a small city, we now believe that Home Inns' business model and product can work in cities with at least 2 million people and $5 billion in GDP. There are around 180 cities in this size in China. We believe that entering these cities and continue to broaden our geographic coverage will further strengthen our brand and our early mover advantages, as well as provide us with a more diversified revenue base.

For example, during the economic downturn, our performance was helped by the strong trends in the central, western, and northern regions, while Shanghai and the coastal cities were hardest hit. So the combination of short-term fixes to drive occupancy in travel regions and potential long-term shifts in our expansion strategy as it’s related to the regions, we will look to maximize our geographic advantage and return our investments.

Now, let me take a look at our hotels’ development. We opened a total of 51 new hotels to reach a total of 522 hotels in operation and enter into seven new markets, leading to our presence in a total of 101 cities.

Of the 51 hotels that opened during the quarter, 23 were franchise and [inaudible] hotels, or 45% of our new units. This indicates our continued success in [growing our franchise business], even in an economically challenged time. Our development pipeline, including 63 hotels at the end of the quarter, of which 28 were [inaudible] and 35 were franchised and managed. This reflects our still cautious view on general market conditions and our discipline and prudence in not over-committing our financial resources.

Continuing on the discussion regarding financial resources, as we announced earlier, we will be receiving $50 million through a private replacement of [inaudible]. This transaction will enhance our balance sheet, provide us with financial flexibility necessary to face opportunities when the right time comes, and allow us to become completely focused on executing our business strategy.

Although we experienced stabilization in business towards the end of the quarter and saw signs of further recovery recently, it is still too early to be sure of timing of a meaningful recovery. Given our [inaudible] outlook, we will continue to pursue a path that balances carefully between growth and profitability, ensuring the foundation of our business remains solid. Although the economic situation has certainly led to the challenge that we are working to overcome, it has also provided us with a new opportunity to strengthen our leadership position in the economy hotel space, as we are seeing a diminishing number of significant competitors with the capital required to match even our careful level of expansion.

As we close the first quarter and look further into 2009, we are hopefully that the worst is behind us as we see performance stabilizing and we have two seasonally strong quarters ahead of us. This is no changing the macro impact of reduced travel on the hotel sectors. However, we are working to mitigate such impact through a more moderate lease and operated hotels opening schedule while taking great advantage of our franchise potential.

At our core, we will continue to work hard to provide business travelers with clean, comfortable, and affordable accommodation across increasingly diverse portions of China.

Now, I will turn the call over to May Wu, our CFO, to walk us through the financials. May.

May Wu

Thank you, David and hello to everyone on the call. I would like to provide some more detail on our financials while also adding color to the underlying [inaudible] that David discussed earlier. As usual, please note that all figures I mention will be in RMB unless otherwise noted.

Our continued expansion again drove revenue growth with revenues increased by 49% year over year to $552 million. This is slightly better than we had anticipated going into the quarter as performance stabilized later in the quarter.

Total revenues from leased and operated hotels were $501.7 million, which represented 47.4% increase year over year; however, was down a percent sequentially as increasing revenues from newly opened hotels were not sufficient to offset the weak seasonality impact. Revenues from franchised and managed hotels grew significantly year over year to RMB30.5 million, or an 84% increase. This was due to the increased rate that we opened franchise hotels over the recent quarters. Sequentially, the 4.1% decrease in revenue from last quarter was again largely due to seasonality.

Franchise and managed hotel revenue represented 5.7% of total revenue, up from 4.6% same period a year ago and slightly down from the 5.9% last quarter.

Although revenues were up, with REVPAR down about 7% year over year, while our operating expenses at hotel levels being largely fixed, we experienced an operational loss for the quarter. As David mentioned, however, part of this loss was due to the negative impact of higher depreciation and amortization cost to revenue ratio. Therefore, while there was an operating loss, EBITDA, which excludes the impact of depreciation and amortization, were up almost 50% year over year and our operating cash flow was again very strong at RMB54.5 million.

Let me go through the cost items to provide you with more detail on our cost trends. Our leased and operated hotel costs for the first quarter of 2009 were RMB470 million, representing 93.7% of the revenues, up from 89.1% in the first quarter of 2008 and 86.7% last quarter. Of the RMB470 million incurred in the first quarter, about RMB21 million related to hotels under construction. While we expect to benefit from cost reduction in the coming quarters from more moderate leased and operated hotel development activities, we have not yet been able to fully utilize the opportunity in the first quarter.

Excluding costs for hotels under development, per hotel costs remained largely stable in absolute terms, with higher rent and utility costs offset by lower other costs. However, as REVPAR declined and hence revenue per hotel decreased, cost ratios worsened, leading to lower leased and operated hotel margins.

The lower REVPAR on year-over-year basis was due to both higher mix of hotels in lower tier cities as well as economic slow-down, while the lower REVPAR sequentially was largely due to seasonality.

Sales and marketing expenses for the first quarter were RMB8.7 million, an increase of 86% year over year and a decrease of 10% sequentially. Sales and marketing expenses represented 1.6% of revenue within our expectations. The year over year and seasonal fluctuation is largely caused by the timing of certain marketing activities.

We have kept tight control on our general and administrative expenses, which were RMB38 million for the quarter. Excluding share-based compensation, this [inaudible] to RMB30 million, or 5.6% of total revenue. This is below both the 8.6% of total revenue in the same period of 2008 and 6% in the previous quarter. And I am pleased with the progress we are making here to limit costs.

With an improved SG&A ratio but higher cost ratio at the leased and operated hotel level, we incurred an operating loss of RMB17.1 million, or RMB9 million, excluding share-based compensation. This compared to the loss of RMB3.8 million in the same period of 2008 with the same measures. However, we reported a strong 49.9% year over year increase in EBITDA for the first quarter. Again, this is due to EBITDA not being impacted by the higher depreciation ratio that reduced our income from operations.

EBITDA was RMB68.8 million for the quarter, or adjusted to RMB60.4 million when excluding foreign exchange gains, share-based compensation expenses, and gain from repurchase of our convertible bonds.

Home Inns reported net income for the first quarter of RMB0.5 million, excluding foreign exchange losses, share-based compensation, and gain from repurchase of CBs, we reported an adjusted net loss for the quarter of RMB7.9 million. This resulting in basic earnings per ADS of RMB0.01 and adjusted -- and diluted loss per ADS of RMB0.39.

The large difference between basic and diluted earnings per ADS is caused by the exclusion of the gain from CD repurchased in the diluted earnings calculation while the gain was included in the basic ADS calculation.

Excluding foreign exchange losses, share-based compensation gained from repurchase of our own CDMA, adjusted basic and diluted loss per ADS were RMB0.22, or $0.03 in U.S. dollar terms.

Operating cash flow generated during the quarter was strong at RMB54.5 million. We had capital expenditure of RMB100 million. However, cash spent on purchase of PPE totaled to RMB213 million as we pay down the large construction payable balance at the end of last year resulting from the large number of leased and operated hotels we opened during the last year.

We also spent an additional RMB38 million on repurchase of our own convertible bonds. After the repurchase, we had RMB841.4 million in CD outstanding, including principal and accrued interest.

Home Inns remained strongly capitalized with cash and cash equivalents of RMB500 million at the end of the quarter. In addition, as we announced today, we have entered into a definitive agreement with CTRIP to obtain $50 million of funding by issuing approximately 7.5 million ordinary shares, or 9.5% of our [post-deal] basic share base.

The issuance price is $13.3076 per ADS in U.S. dollars, which is the average closing price of our ADS for each of the trading days within the 30-day period preceding the agreement date, or from April 7th to May 6, 2009.

We cannot anticipate how market conditions will develop in the coming period and prudent financial planning is always among our top considerations, along with the best interest of our shareholders. We entered into this financing transaction after exploring and carefully evaluating various potential options and believe this transaction will provide us with flexibility both financially and strategically, and leave us more focused on executing our long-term business plan.

Finally, our outlook for the second quarter of 2009 is the revenue range of $610 million to $630 million, based on the stabilizing, however, still negative year over year trend we are currently experiencing.

With that, I will turn it back to David.

David Sun

Thank you, May. Our future as the leader of the Chinese economy hotel space remains clear -- as we cautiously yet effectively work to take advantage of our opportunities presented to us. We are dedicating to guiding Home Inns successfully through the near future to provide the best possible outcome in the coming years. Thank you.

Now we are happy to answer any of your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Mr. Paul King with Oppenheimer. Please proceed, sir.

Paul King - Oppenheimer

Looking at the performance, I was wondering if, for the hotels open 18 months, what percent of them are currently cash flow positive now and can you give us any idea of which particular regions may have done particularly poorly or better than expected?

May Wu

If we were to look at the hotels that have been open for at least 18 months, you can see that REVPAR was at 153 and occupancy was at 89.9%, so they are all comfortably cash flow positive.

Those hotels are still more concentrated in larger cities as 18 months ago, we still have a more concentrated portfolio compared to what we have today, and that attributed actually partially to the larger than overall decline of the same hotel -- larger than average decline on a same hotel basis versus chain wide, because as we mentioned, Shanghai and the coastal cities were more impacted than the rest of the country.

Paul King - Oppenheimer

And looking at your costs, which costs -- how did payroll increase this quarter and utilities -- anything unusual in cost increases this quarter versus [inaudible]?

May Wu

If we look at the cost components within the quarter, we see on a per hotel basis, rent is the largest -- rental increase is the most noticeable cost increased trend, and this is because of the rental pressure that we experienced in 2007 and in 2008, so on an apples-to-apples comparison for the same location, the hotels that opened in ’07 and ’08 would have higher rent compared to their earlier equipment locations.

All the other cost components, if we were to look at a per hotel basis, were fairly stable, or actually declined somewhat. This is by and large because of the -- also the mix change into smaller cities where let’s say personnel costs, et cetera, were also lower. So on an apples-to-apples comparison basis again, most of our unit costs remained fairly stable on a same apples-to-apples comparison, except for rental that we saw some increase.

Paul King - Oppenheimer

Thank you.

Operator

Our next question comes from the line of Chris Woronka with Deutsche Bank.

Chris Woronka - Deutsche Bank

A question on the sale of shares to CTRIP -- do you have any idea what their intention might be with those shares? And then for you with the proceeds, how should we think about that? I mean, were you planning to buy back more of the convertibles or just what your plans are there?

David Sun

CTRIP is the largest travel portal in China and so our largest travel agency channel partner. I think we will continue to work on strategic alliance without them being our largest shareholder.

May Wu

And to continue on your second part of the question, the proceeds will be used for general corporate purposes and when and how it is going to be used, depending on our development plan, whether or not we will continue to buy back our CV also depends on our overall plan and market opportunity.

Chris Woronka - Deutsche Bank

Right. I guess I am just doing a little quick math here and if I add the $50 million to the cash you currently have, and I kind of throw in my cash flow assumption for the next I guess eight or nine quarters, seven or eight quarters, it looks like you would be in a position to potentially have that, those remaining CVs kind of fully covered. Is that kind of in line with your internal model?

May Wu

Well actually, even without this financing, we have planned for that, our CV will be fully covered. The question for us is always then what can we do after being prepared for the CV repayment -- how many -- what can our development plan be for the remainder of the year and for 2010? I think this financing transaction plus the bank arrangements that we are still currently working on will give us great flexibility depending on the market conditions to decide for the second half of the year and 2010 what our development plan will be. So this financing, we can, if we see the opportunity in a warrant to be on a fairly consistent growth path at the rate we are achieving this year but we do not necessarily do so -- again that will depend on the market condition.

Chris Woronka - Deutsche Bank

Okay. That’s great. And then one final one -- anymore thoughts to developing anymore H hotels, or is that kind of -- is the future development kind of on hold, now that you’ve got two opened?

David Sun

I think -- each hotel opened last December. By three or four months practice in the market, it is well encouraged by the [inaudible] customer. But based on today’s economic condition, we are still pretty conservative to work out the further development plan. So right now we still have one leased and operated H hotel in Shanghai and one franchised H hotel in [inaudible]. We don’t have a very detailed rollout plan in the near future.

Chris Woronka - Deutsche Bank

Okay, great. Thanks.

Operator

Our next question comes from the line of Hao Hung with Brean Murray, Carret & Co.

Hao Hung - Brean Murray, Carret & Co.

I just want to follow-up on Chris’ question on the purpose of the funding -- I mean, you actually don’t need that much cash on your balance sheet. You had $500 million now, plus $50 million so at the end of this quarter, are you going to have RMB800 million, RMB900 million minus probably RMB200 million for CapEx -- you still have RMB700 million. That’s quite a bit of cash sitting on the balance sheet and also you have positive cash flow. I am just curious -- why do we need so much cash sitting on the balance sheet for the rest of the year in 2009?

May Wu

As we mentioned that in a prudent financial planning is always on the top of our considerations. With the potential refinancing coming at the end of last year, while we cannot anticipate the market conditions for the coming quarters, we think it’s prudent to provide ourselves with some flexibility. And the amount that we raised and the equity we issued represents less than 10% dilution to our current share base, and that will provide us with the flexibility, as we mentioned, to decide, depending on market conditions, what our development plan should be for the coming year or years.

As you know, we need some time to develop our properties to negotiate the signed contract and to convert the hotels if we want to open them in 2010. So now it’s a good time for us to start planning for 2010 and beyond and by having this cash on hand, again we will provide us with the flexibility, both financially and strategically.

Hao Hung - Brean Murray, Carret & Co.

Okay, so when do we book the cash into your financial statement and when do we start increasing the number of shares in our EPS calculation then?

May Wu

The deal is expected to close in about two weeks on May 21st, so that’s when we will receive $20 million from CTRIP and the shares will be issued and considered issued. Then the remainder of $30 million we expect to receive within another 30 days.

Hao Hung - Brean Murray, Carret & Co.

Okay. And I remember a travel agency -- sales going through travel agency tend to be less profitable sales because they charge sometimes a rather hefty commission and in the first few months of the year, we see a dispute between Green Tree and CTRIP. Now with CTRIP owning so much of your company, that changed the terms of doing business between you and CTRIP.

David Sun

I think you are right. The travel agency always is a [inaudible] for our business but I think we still maintain 6%, 7% of travel agency as our custom mix. I think although we are doing -- although the CTRIP invests in our company but we believe that we are still on very independent base to run [inaudible] business.

So they are still our largest travel agency channel I think in this time and also in [inaudible] but we don’t want to increase the channel mix. We don’t want to change the channel mix for our Home Inns customer base.

May Wu

And I would like to add that after this deal, combining what CTRIP is purchasing in this transaction as well as what they have already owned, they will become about an 18% shareholder of our company and they remain a passive investor without any board representation to our company. And given as David mentioned, given that they are already our largest channel partner, we will continue to develop more efficient solutions with them, with or without them investing in us.

Hao Hung - Brean Murray, Carret & Co.

Right. Just one final question -- could you remind us what is the percentage of business that is going through travel agency at the moment?

May Wu

About 7% in total and to CTRIP, it’s about 5%, and it’s been fairly consistent over the past few quarters.

Hao Hung - Brean Murray, Carret & Co.

All right. Thank you.

Operator

Our next question comes from the line of Marisa Ho with Credit Suisse.

Marisa Ho - Credit Suisse

Good morning. Congratulations on a better-than-expected set of results and the CTRIP transaction as well.

I remember three months ago you were talking about a development program of about 130 to 150 new hotels in 2009? Given that you have already signed up and opened roughly about 110 to 120, do you think the stated development plan is still on course or do you think with the CTRIP investment, you may want to accelerate the opening plan after all in the rest of 2009?

David Sun

I think we still will -- we will still maintain our previous development plan. That’s for two reasons -- first of all, we are still very concerned about the market situation. We do see some improvement from them recently but we are still not sure. That’s what we call the full recovery in the near term, so we are still very conservative and [inaudible] to [inaudible] our development strategy.

And the second reason because for the development, we need to have at least four to six months lead time, so in times of [inaudible] development plan, we don’t have too much room to increasing our development plan for this year?

May Wu

And given that backdrop, is it realistic to continue to expect a margin improvement in 2009? I mean, because your operating loss should be quite a bit reduced compared to 2008.

May Wu

It’s possible that we will experience margin improvement in 2009. As we mentioned, as the hotel development program continued to moderate throughout the rest of the year, that will help us margin wise. And the remainder factors that will contribute to margins by and large the top line, so how will our hotels actually perform throughout the rest of the year -- that is the critical factor in terms of how our margins will turn out. As we mentioned, we have a fairly high level of fixed cost at the hotel level. Right now, we are still seeing modest year-over-year decline chain wide, as well as on a same-hotel basis. The trend has slightly improved at the end of March and April, but we are still not seeing a meaningful or strong recovery yet. So at this time, we are hopeful but we are still cautious. We will say that overall, as we mentioned from the earlier part of the year, we believe overall company margin will be stable or have slight improvement, helped by the more moderate development program, whether or not it would turn out to be better than that, we will still have to see.

Marisa Ho - Credit Suisse

Okay, great. Thank you.

Operator

Our next question comes from the line of Cici Lam with Citigroup.

Cici Lam - Citigroup

Good morning. I have a question for David -- you mentioned that you saw a significant number of diminishing competitors in the industry -- could you expand on that?

David Sun

I think for the year 2009, it is -- starting from the second half of 2008, especially in the beginning of 2009, the development or the expansion in the economy hotels in China is getting slowed down. I think two reasons -- one is because of the economic condition, everybody would be [inaudible] expansion in this tough market. Second, I think more importantly is the funding requirement because most of the competitors in the front is private investment companies, so the funding needs for the expansion always is a question for most companies, so that’s the reason we find and feel that the competition in development is getting more soft.

Cici Lam - Citigroup

Right. Can you comment on H Hotel performance and how big is the loss in the quarter?

David Sun

I think H Hotel -- we opened H Hotel last December and also entered what we call a slow season in the Chinese New Year, and so starting from -- we see the improvement month to month and on the March -- on April, [inaudible] improvement day by day but we still have some loss in about $4 million in the first quarter because of the slow season for the market, and also special -- in Shanghai, it’s the most [inaudible] from the economic conditions.

But we [inaudible] help the performance of the H Hotel so we believe that by the time the market is getting warmed up and also the improvement internally we have, we do have -- we do -- fairly confident to see the improvement in the very near future.

Cici Lam - Citigroup

Right, and what was the REVPAR for each hotel?

David Sun

The REVPAR in the -- the first quarter, the REVPAR is 148, in what we call two hotels, two H Hotels -- one opened in last December, one opened in January of this year.

Cici Lam - Citigroup

Right. And can you comment on the Shanghai Expo next year? Do you expect any benefit to Home Inns?

David Sun

Everybody is talking about the Olympics last year and now everybody is talking about 2010, the Shanghai Expo -- but as a company, as a long-term strategy company, we are not just focused on some events. So in general, we say the government will be -- promote this activity. We do believe that more people will be flown into Shanghai and also we would be -- partially would be benefit for the economy hotels in Shanghai base, or the surrounding area, like [inaudible]. But we don’t have a very clear picture to see how this would be a benefit for our company.

Cici Lam - Citigroup

Okay. Thank you.

Operator

Our next question comes from the line of Robert Zu with [inaudible] Asset Management.

Robert Zu - Analyst

I have two questions here -- my first question is I heard that you want to open more [inaudible] in northwest China, about 100 before 2011, but as we know, the occupancy rate there is quite low, so the [inaudible] of that and I think that your Q1 result is already affected by these lower [inaudible] cities. So I think that your REVPAR may continue to decrease by that.

And my second question is that the [inaudible] hotel will take a higher proportion this year than the past, but it seems that the franchise fee will be lower than last year. I don’t know whether -- is that real? That’s my question.

David Sun

For the development plan, we are still balancing approach -- developing an expansion plan in the whole China. We do -- we are not really focused on one region in today’s base, so I think it’s -- with discussion before, it’s more special for this time -- north region, central region, and also the West Region has got more impact by the economy downturn. So that’s -- less impact, yeah -- less impact by the economy downturn. So we are -- just say this is the fact -- so we don’t -- we are not focused on just say we want to open in the north region but still a very balanced approach nationwide.

But in the north and west region, the occupancy still keeps very strong. It is not like you say, it’s getting -- the occupancy is not that good.

May Wu

And I will comment on the franchise revenue side -- actually, this quarter our franchise revenue represented an over 80% year-over-year increase, helped by the higher mix of franchise revenue -- by the higher mix of franchise units in our total portfolio.

Robert Zu - Analyst

Okay. Thank you.

Operator

Our next question comes from the line of [Jeff Hu] with [Grand River Investments]. Please proceed.

Jeff Hu - Grand River Investments

I have a question about your performance of your hotels in the second quarter. Would I [inaudible] --

David Sun

I cannot give you exactly the number because the quarter is not finished yet. We cannot give you the forecast too detailed. And I can give you the trend of the business today in [inaudible] operation. We see what do you call the recovery, the software recovery, especially after Chinese New Year and more recovery or we say the improvement by -- start from April. So we believe that the trend is getting better, but we cannot -- we don’t know that -- it’s a meaningful recovery in the very near-term but I think it’s getting better. That’s a fact.

Unidentified Participant

Internally, what are you expecting your REVPAR to be for the full year?

May Wu

In the range of low 130, low 140 range.

Unidentified Participant

Low 140s?

May Wu

Yes, for the full year.

Unidentified Participant

And that’s using what, 110, 120 new hotels?

May Wu

130 to 150 new hotels, as we discussed earlier.

Operator

Our next question comes from the line of Marisa Ho with Credit Suisse. Please proceed.

Marisa Ho - Credit Suisse

Could you remind us the ADR for the extra hotel in Shanghai and [inaudible] right now? What I mean is the ADR that you achieved over first quarter 2009?

May Wu

Sure. Just hold on one second -- the ADR for both hotels were 332 for the first quarter, but REVPAR, as David mentioned, was 148, so occupancy is still quite low, given that both hotels just opened and it’s a seasonally slow quarter.

Marisa Ho - Credit Suisse

Great. Thank you.

Operator

You have a follow-up question from the line of Hao Hung with Brean Murray.

Hao Hung - Brean Murray, Carret & Co.

Thank you. May, I just want to ask one more question on the franchise hotel, as franchise is your key strategy going forward. Now, I am seeing at the end of first quarter 2008 you have 79 franchise hotels and now you have about 168, so that is slightly more than double in the number of franchise hotels you have in your portfolio but your [inaudible] is only going by about 80% to 85%. So to me, there seems to be a small decrease in the sales per hotel. So I am just wondering, is it because you are charging a lower franchise fee in the second and third tier cities?

May Wu

This is not because we charge a lower fee percentage -- the fee percentage remains the same but the revenue decline is consistent with the REVPAR decline due to the mix change into smaller cities. As you may recall, our franchise strategy is that we will first open a few hotels in any particular region or city, then we will open it up for franchising. And as -- now we are in a lot more lower tier cities, these cities have also become our franchise -- our target market for franchising. So the revenue decline is -- on a per hotel, per franchise hotel basis is consistent with our REVPAR decline due to the mix change.

Hao Hung - Brean Murray, Carret & Co.

Okay. Thank you.

Operator

(Operator Instructions) You have a question from the line of Mr. Jeff Hu with Grand River Investments. Please proceed.

Jeff Hu - Grand River Investments

You mentioned earlier that there was a rental squeeze or rental pressure in ‘07/08. Can you talk a bit more about how that has lessened and how that would affect your margins? And what are we looking at in the recent rents that you have taken up? And the follow up with that, is what your construction costs or [inaudible] costs have been recently compared to say a year ago?

May Wu

In terms of rental, we started in 2007 and 2008, we saw modest rental increase in smaller cities but very large rental increases in larger cities. And this increase has stopped, or to a certain extent, reversed, starting from the end of 2008. And now we are seeing rental stabilization in smaller cities and actually decrease in certain large cities.

In terms of how that’s going to benefit us, the benefit will -- we will not benefit from this trend too much this year, given that we are opening a limited number of new leased and operated hotels this year. But I think overall we are seeing a more rationalized competitive landscape in terms of competing for properties.

As we mentioned, operational wise, we always -- we have always said even with the number of competitors in the industry, we believe the market is large enough for everyone. So in ’07 and ’08, the competitive pressure that we experienced is mostly on obtaining properties and now that has eased and we believe we will continue those for the foreseeable future.

Jeff Hu - Grand River Investments

And your other costs are roughly the same?

May Wu

That’s correct, including construction costs. We are able to basically manage efficiency and modify product attributes, et cetera, to maintain a fairly consistent construction costs per room.

Jeff Hu - Grand River Investments

Sorry, if you could remind me, for your rental agreements, how long are they for?

May Wu

The rental agreements are typically 10 to 20 years and our average rental period is about 15 years. And within the 15 years, rental is fixed. They do have [inaudible] and the [inaudible] is typically about 1% a year.

Operator

At this time, you have no further questions.

David Sun

Okay, so thank you, everyone, for participating in today’s conference call and if you have anymore questions, you can directly contact us by phone and email. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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