Executives
Ethan Ruan - Investor Relations Manager
David Sun - Chief Executive Officer, Director
May Wu - Chief Financial Officer
Analysts
Chris Woronka - Deutsche Bank
Paul Keung - Oppenheimer
Robert Zu - Analyst
James Lee - Sterne, Agee & Leach
Eddie Leung - Banc of America
Lin Ho - Morgan Stanley
Marisa Ho - Credit Suisse
Chris Zi - Analyst
Home Inns & Hotels Management Inc. (HMIN) Q2 2009 Earnings Call August 5, 2009 9:00 PM ET
Operator
Hello and thank you for standing by for Home Inns’ 2009 second quarter earnings conference call. (Operator Instructions) I would now like to turn the meeting over to your host for today’s conference, Ethan Ruan, Home Inns' Investor Relations Manager. Please proceed, Ethan.
Ethan Ruan
Hello, everyone and welcome to our earnings conference call for the second quarter of 2009. Our second quarter earnings results were released earlier and are available on the company’s website. With us today is David Sun, our Chief Executive Officer; and May Wu, our Chief Financial Officer, who will be further discussing our performance for the past quarter. After their prepared 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. Welcome to our second quarter conference call. Thank you for your interest in Home Inns and your participation today. We are pleased to report that total revenues for the second quarter of 2009 increased 43% year-over-year to $642.1 million, exceeding our target and previous guidance. This growth was driven by an increase in the number of hotels in operation, the maturity of hotels open in the past few quarters, as well as an easing of the economic pressure in China, which resulted in increased domestic travel. This is a positive sign to recover after several quarters of travel reduction in many regions in China.
We also reported that income from operations excluding share-based compensation expense reached $74.1 million for the quarter, an increase of 102% year over year and representing 11.6% of total revenues, up from 8.2% in the same period a year ago. In late 2008, as we began to fully feel the impact of the economic crisis, we quickly and effectively took aggressive steps to refine our business strategy, especially regarding our new hotel development schedule. This adjustments were implemented and ensure our continued growth was sensibly balanced with the impact of costs on our bottom line, [inaudible] rapid growth and a strong margin affects that we are striving [our balance].
During our recent past period of the rapid expansion, we have sacrificed some margins to ensure we realized the full future potential of Home Inns. During the second quarter of 2009, we have experienced the benefits of the refinements we made as we met or exceed the financial and operation targets we set for ourselves.
Our modest new hotel openings have demonstrated the underlying ability of our hotels to achieve strong profitability and margins, even in the most challenging times.
Although it was unavoidable to experience some impact from the economic downturn on our results starting in late 2008, mitigate the effect and work hard to position Home Inns to success within the business realities that have developed. While we are aware that it will not necessarily be smooth sailing from this point forward, we are proud of these achievements and believe the toughest time is behind us. Given the improving trend that we have experienced to date, we are increasing our full-year revenue guidance from the 28% to 33% year-over-year increase to a range of 33% to 35%.
Now, let me provide you with some more detail on our operational performance for the quarter.
The occupancy rate across the hotel chain rose above 90% to 92.4% in the second quarter, compared with 88.2% this time last year and 82.6% in the first quarter. The year-over-year shift was largely due to the reduced [inaudible] of new hotels throughout the chain which typically have dilutive impact on occupancy. Given the low occupancy ramp-up period that every new hotel experiences, the sequential improvement was mainly due to the seasonality as the second quarter is the busy quarter for the business travel while the first quarter was affected by the slow traffic during the Chinese New Year. In addition, the more favorable travel environment contributed to the improvement.
We are pleased to report the sequential increase in REVPAR to 148 from 130 in the first quarter. However, we have to note the primary impact of seasonality in this improvement. Although we are encouraged by the improvements in domestic travel market towards the later part of the second quarter, we could not fully avoid economic realities compared to a year ago where second quarter REVPAR was RMB153.
A key driver in this decline is the average daily rates, or ADR. While part of ADR decline was largely anticipated and discussed as a result of percent of more Home Inns hotels in low tier cities, where we charge a low daily rate, the impact was amplified by the generally still reduced level of business travel compared to a year ago. This result in the less favorable customer channel mix and the selective downward price adjustments, both of which negatively impacted realized ADR.
The downward price adjustment were more concentrated in the first tier cities where the travel market has been especially hit in the past and are the slowest to recover at this time.
Despite the low room rates in low tier cities hotel, those cities and hotels have shown more resilience during this economic downturn, providing us additional confidence that our strategy to achieve broader geographic coverage will not only lead to stronger brand recognition and a large customer base but also a more diversified and stable business overall. As we expect to continue to expand into low tier cities, we believe the impact on ADR will continue. However, it will gradually moderate.
Let me now turn to our progress and plans regarding hotel development. At the beginning of 2009, we decided on our adjusted development strategy for the year to limited new commitments for leased and operated hotels, while the remaining franchise and [inaudible] hotels development. We anticipate a majority of our -- of new leased and operated hotels to be open in the first half of the year, while the new franchise and [inaudible] hotels will be open for evenly throughout the year.
During the second quarter of 2009, Home Inns opened 25 net new hotels, including 15 leased and operated hotels and 10 franchise and manual hotels, meaning that Home Inns' hotel chain consisted of 547 hotels in operation -- in comparison, 107 cities in China. We have opened 43 of [inaudible] 65 leased and operated hotels in the first half of 2009. Given our reduced control over the opening date of our franchise hotels, 33 new hotels or slightly less than half of our expected full-year target for franchise and [manual] hotels open in the first half.
I want to emphasize that this is not normal and we do not have any concern over the potential of funding of our franchise hotel openings. Indeed, with the economic conditions that we are experiencing, we are seeing stronger interest from the franchisee community due to the strengths of our brand and ability to demonstrate a proper business model, even during the tough market conditions.
One important driver of our hotel’s performance is the power of our large and expanding member network. We are again pleased to see that at the end of the quarter, we now have over 1.8 million active Home Inns members who contribute 51% of room nights in the second quarter.
I actually believe the slow down in China has strengthened our relatively competitive position. We are facing somewhat [softer] pressure on the competition for the properties, even in the primary locations. And we believe our market share will continue to expand as new entrants into the market are reduced.
Our stronger financial position and profitability means that Home Inns is able to continuously invest in our people, something that is reflected in the quality of our staff and our hotels. We are proud of our ability to offer our customer the same high quality experience that they have become accustomed to across a large set of cities and locations.
We are also taking advantage of a more moderate growth pace to locate more resources to improve our internal infrastructure and process in all areas, which we believe will lead to high standards and efficiencies and benefit our business for a long time to come.
With the first half of the year behind us, Home Inns is on track for a second half of solid execution and it is on solid ground for continued growth going forward. As we look at the rest of the year and into 2010, we remain cautiously optimistic that the economy will continue to gradually recover. Given our expectation of further stabilization, we are examining the feasibility of reaccelerating our development plan.
We continue to believe that the continued expansion remains the best option for our long-term business strategy and will be essential to driving our long-term results, with a recovering economy we expect to see operational and financial improvement and we believe we invest in our future growth in a sensible manner, meaning taking a balanced approach to growth yet profitability will benefit Home Inns over the coming years while returning the best possible result to our shareholders.
Now I will turn the call over May Wu, our CFO, to walk 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 by adding color to the factors that David has just mentioned. As usual, please note that all figures will be in RMB, except noted.
As David already discussed, our revenue for the quarter increased 43.3% year-over-year to RMB642.1 million, representing a 20.6% increase sequentially. Total revenue from leased and operated hotels were RMB609.1 million, representing 43.5% increase year over year and a 21.4% increase sequentially. The year-over-year increase was primarily attributable to our larger hotel portfolio while the sequential increase was attributable to new hotel additions, normal seasonality, as well as gradual recovery in market conditions.
Revenues from franchised-and-managed hotels were RMB32.9 million, which represented a 40% increase year-over-year and an 8.1% increase sequentially. A larger number of franchised-and-managed hotels in operation, seasonality, and business recovery all helped to increase franchise revenues. This increase was partially offset by lower up-front franchise fee recognition during the quarter, as only 10 franchise hotels were opened, a lower number compared to both Q2 of 2008 and last quarter.
We continue to control our costs wherever possible, leading to total operating costs and expenses excluding share-based compensation for the quarter declined to 82.3% of total revenues, from 85.9% in the same period a year ago and 95.6% last quarter. This was despite a still challenging operating environment, especially early in the quarter. Of course, a seasonally stronger second quarter also helped in the sequential comparison.
Leased-and-operated hotel costs for the second quarter of 2009 were RMB486.1 million, representing 79.8% of their revenues, down from 82.1% in the same quarter of 2008 and 93.7% last quarter. These improvements stemmed from fewer new hotels as the percentage of total hotels, as well as fewer hotels under construction, leading to lower pre-opening expenses.
As we previously mentioned, pre-opening expenses totaled over RMB26 million in the second quarter of 2008 and RMB21 million in the first quarter of 2009, but this quarter it was only about RMB10 million. Sequentially, the percentage improvement was also from a higher REVPAR and lower heating costs during the quarter, among other factors. As a result of our effective cost control, even stripping out the impact of pre-opening expenses, we were able to maintain fairly stable operating cost ratio at the hotel level despite a still lower year-over-year REVPAR at our mature hotels.
Sales and marketing expenses were RMB5.2 million for the second quarter of 2009, a decrease of 3.9% year-over-year and 39.5% sequentially, as we used a less aggressive marketing plan this past quarter, especially after the chain-wide promotion program that ended in March.
G&A expenses were RMB43.5 million for the quarter and excluding share-based compensation, this falls to RMB37.0 million, or 5.8% of total revenue for the quarter, which is below the 6.9% of total revenue last year and around the same as the 5.6% in the previous quarter. We are able to leverage on our already established corporate infrastructure and limit cost increase even as our hotel chain grew.
These items led to income from operations for the quarter reaching RMB67.7 million or RMB74.1 million when excluding share-based compensation expenses, and that compared favorably to a loss of RMB9 million in the first quarter and more than double the RMB36.7 million for the second quarter of 2008.
As mentioned in the press release, our adjusted EBITDA reached RMB149 million, up 81.4% year over year and we again had generated a healthy operating cash flow of RMB180.5 million for the quarter.
Net income for the second quarter was RMB100.4 million, which included a RMB46.5 million gain from repurchase of our own convertible bonds. Excluding this gain as well as foreign exchange losses and share-based compensation expenses, we reported an adjusted net income for the second quarter of RMB60.6 million. This results in adjusted diluted earnings per ADS of RMB1.55 or $0.23.
We had a free cash flow positive quarter with a substantial operating cash flow of RMB180.5 million, as I mentioned before, and RMB99.6 million was cash spent on the purchase of property and equipment, which included new capital expenditure of RMB60.9 million and the rest resulting from reduction in payables.
At the end of the quarter, we had cash and cash equivalents of RMB624.6 million, including cash received from Ctrip during the quarter for the previously announced private placement transaction. Our convertible bond balance stood at RMB477.7 million.
We believe we have a strong balance sheet that will support our planned growth for the foreseeable future. We have also secured several hundred million of multi-year bank credit facilities for the additional flexibility if necessary.
Finally, our outlook for the third quarter of 2009 is a revenue range of RMB685 million to RMB705 million, based on the stabilizing trends we are currently seeing. We also now expect a total revenue for the full year of 2009 to grow between 33% to 35% over 2008, up from the guidance of 28% to 33% year-over-year increase we announced when we discussed 2008 year-end results in March 2009.
We are pleased with our progress and I look forward to updating you again soon.
Now I’ll turn it back to David.
David Sun
Thank you, May. Home Inns is the leader in economy hotel sector in China and I believe that the strategic focus we have in place, along with the dedication of our management and employees will help ensure this remains true as we look into the future. Thank you and May and me will be happy to answer all of your questions.
Question-and-Answer Session
Operator
(Operator Instructions) Our first question will be from the line of Chris Woronka from Deutsche Bank.
Chris Woronka - Deutsche Bank
First of all, I guess congratulations on a really terrific quarter and my question is with your commentary about things kind of stabilizing and maybe getting a little bit better, does this change how you view your -- you know, first your development pipeline of your core Home Inns brand and secondly maybe revisiting a little bit more development on the H hotel side.
May Wu
Thank you for joining us today. As David mentioned in his commentary, now that we are seeing stabilization and hopefully a continued improvement in the second half, we are examining the opportunity to accelerate our growth pipeline. However, given that currently it’s already the beginning of August, our plan will mostly be reflected in new hotel openings in 2010. Therefore, what you would expect to see is we would be on track to hotel openings for the second half of this year and contracting activity will start to accelerate as we speak but new hotel construction may start in the fourth quarter, leading to additional hotel openings in 2010. At this time, we are planning a reacceleration of development of total hotels in both leased and operated segment and franchise and management segment for the year of 2010 and forward.
David Sun
Chris, regarding the H hotels, I think after we saw the stabilization for the market and also after the -- about nine months practice in H hotels and we learn and we try to more -- consolidate all the experience we have, so from -- I think from the second half we start to more active to look at opportunity to expand our H hotels new product.
Chris Woronka - Deutsche Bank
Okay, great. That’s helpful. And then as I look at the hotel statistics you provided, I noticed that the -- the REVPAR for your system wide hotels was kind of a 3% and on the like for like it was down about 4 and I guess how should we think about that? Is that more a function of more hotels in lower tier markets coming into the like-for-like comp set and therefore kind of lowering the overall AVR? Or is there something else going on because I know in prior quarters the like-for-like number had been stronger than the total portfolio number.
May Wu
The down 3% only for chain wide performance was partially helped by the lower mix of new hotels in the portfolio but it was also helped actually by the more resilient of our hotels in lower tier cities and central and northern part of China. While in the like-for-like comparisons for hotels open for over 18 months, those hotels are still more concentrated in coastal cities, in Shanghai and Beijing, which as David mentioned again in his commentary, that those cities are the slowest to recover. So we are actually pleased to see this trend, meaning that this is a further validation of our strategy to really pursue a broad-based and diversified footprint all across China.
Chris Woronka - Deutsche Bank
Okay, great. Very good. Thank you.
Operator
Our next question will be from Paul Keung from Oppenheimer.
Paul Keung - Oppenheimer
On the call you mentioned a couple of interesting comments -- you said [inaudible] strengthening franchising interests as well as considering reaccelerating development plan, so I was just curious as you sort of map out your capital commitments and how fast you are willing to grow, I was curious to what level you are willing to push your growth? And when you say [inaudible] franchising commitment, how strong is that backlog now versus where you were let’s say six to 12 months ago [inaudible]?
May Wu
When we think about our -- you know, we are in the process of finalizing our plan for 2010 but if you think back last year we opened 200 hotels, including about 130 leased and operated and 70 franchise and this year we are planning to open 65 leased and operated and 65 to 85 franchise. And the franchise portion has been somewhat stable.
Our plan for next year, what we are thinking right now -- again, this is our preliminary thinking and does not represent our guidance or final plan for 2010 yet, we are still thinking a slight ramp-up in franchise operations, maybe between 80 to 100 and possibly a similar number for leased and operated hotels.
And looking at our capital commitments then, I am sure you are well aware that each of our hotels require RMB6 million to RMB7 million up front investment, so let’s say if we open 80 leased and operated hotels, that will require a new CapEx of RMB600 million range. And as we mentioned that we have a strong balance sheet at this time, we have healthy operating cash flow and we have secured additional several million, several hundred million multi-year credit facility from the bank, so we are very well funded and we are ready to take whatever the opportunity presents for future growth.
Paul Keung - Oppenheimer
Okay, that’s great. And if you manage -- and again, this is all just preliminary -- if you manage to run at that sort of level of development growth, just to give me an idea from a planning standpoint, at what point are you able to really fund your commitment just out of operating cash flow?
May Wu
Well, we can talk about a rough range. As you see last year, we generated operating cash flow of over RMB350 million and this year with the larger hotel base and stabilizing operational performance, we should be fairly -- let’s say 30%, 40% above that. And next year in 2010, if we maintain a -- let’s say 30% unit growth and stable margin, the operating cash flow should again grow in line with our unit growth. So by our rough estimate, we should be continuously be able to self-sustain around an 80 kind of leased and operated hotel opening for next year and going up year over year, as our hotel base grows.
But one thing to keep in mind is that this number will be impacted by the performance as our margin is fairly sensitive to the occupancy and REVPAR fluctuation.
Paul Keung - Oppenheimer
That actually leads to my next question -- you’ve had a decent number of hotels graduate into that 18 month category in the last three to six months. I was curious how those hotels that have sort of moved into the relatively more mature phase done in this year’s generation.
May Wu
For the recent graduates or the ones that just reached 18 months, I would say the performance is largely within our expectation. We conducted a fairly extensive review of our existing properties. The ones that -- there’s not a huge diversification between the early class and the later class, except for the factors that they are in larger cities or smaller cities, therefore the expense mixture, the mix of expenses is different.
Paul Keung - Oppenheimer
Thanks for taking my questions -- again, solid quarter.
Operator
(Operator Instructions) Our next question will be from Robert Zu from [inaudible] Asset Management.
Robert Zu - Analyst
First, congratulations for your excellent performance in Q2. I have a few questions here -- first is I already heard somebody mention this question before but I still, I want to ask this question. I don’t know why we decreased opening of franchised hotels in Q2, since as we know these type of hotels are less of a risk.
And the second question is was the H1N1 flu affecting us? And since I cannot see any effect in our Q2 report, the [inaudible] rate is quite high. Thank you.
David Sun
Thank you for the question. First on your question, because I mentioned in my script, because of the opening time is less control in franchise and franchise and managed hotel sectors, so in the first half we opened 33 new franchise and managed hotels. That means we don’t have any concern about the number of 80 new -- or the target of 80 new -- 65 to 80 new franchise and managed hotels we opened in 2009. That’s only the opening date is a little bit hard to control in the franchise side.
May Wu
I want to add that typically if you look at our history in the past few years, we tend to open more hotels in the second half but internally, we make a conscious effort to even out the hotel opening schedules. But for the franchisees, it’s less likely for them -- for example to start the construction process in the first quarter during the winter, so naturally there will be fewer hotels completion in the second quarter.
So a lot of that is just the seasonality of construction and ad-hoc reasons. We did not intentionally slow down franchise openings for the quarter and as David mentioned, we are confident about reaching our franchise hotel opening target for the year.
David Sun
Regarding the swine flu, actually you can’t see the results. We don’t feel a strong impact from our business and overall.
Robert Zu - Analyst
Okay. Thank you and I have another question -- as we can see, our ADR is still low and as you estimate it, when can it return to the normal level? I mean, maybe just like the time of last year, 173?
David Sun
For the ADR, mainly it’s driven by what do you call, the low tier cities we enter because the list price is low. So we still would continue to expand into the low tier cities, so we believe that the impact on ADR still would be there. But however, when proportionally the percentage of the small and other low tier cities were getting smaller and smaller, it would be impact gradually reduce in the future.
May Wu
And just adding to David’s comments, if you look at our hotels that have been opened for at least 18 months during the current quarter, ADR was 171 versus 180 a year ago and we believe approximately half of that is because of the -- some -- the change for mature hotels reflects the pricing pressure from the economic impact and that the rest would be from the mix change, when we think about our entire portfolio, which generated an ADR of 160 for the quarter versus 173 a year ago.
Robert Zu - Analyst
Okay. Thank you. That’s all.
Operator
Our next question will be from James Lee from Sterne, Agee & Leach.
James Lee - Sterne, Agee & Leach
Thanks for taking my questions. Do you guys expect any kind of travel restriction in Beijing for the PRC 60th Birthday heading into October? If so, I was wondering what kind of impact that would have on your business.
And also secondly, would you mind giving us maybe an update on Expo 2010? Is the government giving you any guidelines on hotel pricing in general heading to next year? Do you anticipate any kind of a shortage in hotel rooms during that time? And how do you anticipate the government to capitalize this opportunity? For example, maybe opening new hotels in Shanghai? Thank you.
David Sun
Thank you for the questions and for the first question, at this stage we didn’t feel any of the restrictions -- we didn’t find any restriction for the Beijing for the 60 years anniversary in the country, so I want to say that we still not find any restriction today.
Regarding the second question for the Shanghai Expo in 2010, we believe that is an opportunity for our business and also in Shanghai and also in the surrounding area. Now, as government didn’t give any guidance for the pricing, so we still study on the market and also we try to learn something from the Olympics we have already practice. So we believe that’s opportunity but we are still not finally see the pricing in that time.
James Lee - Sterne, Agee & Leach
Okay, just a follow-up question that you brought up, the Olympic experience from last year, I was curious what did you learn from last year in the hotel industry in Beijing during that time that will enable you to anticipate the market better heading to 2010 for the expo?
David Sun
I think the first learning is we don’t need to build up the hotels just for Olympics. The second one is I think the pricing, we don’t have too high expectation for the pricing because that’s two majors we learn in the Olympic times.
James Lee - Sterne, Agee & Leach
That’s very helpful. Thank you.
Operator
Our next question will be from Eddie Leung from Banc of America.
Eddie Leung - Banc of America
A couple of questions -- the first one is regarding the proportion of revenues from the so-called lower tier markets. As you guys mentioned, this proportion has been growing, so I am wondering, could you share some operating metrics with us on, for example, the proportion of revenues from these so-called lower tier markets, as well as the growth rates from these lower tier markets versus the coastal areas or the top tier cities? Thanks.
May Wu
We do not disclose the exact revenue mix from each tier market but as of now, if we look at our portfolio, for the leased and operated hotels in a group, in terms of the units distribution we have about 18% of our leased and operated hotel units located in first tier cities, about 57% in second tier cities, and about 25% in third tier cities. So that’s the unit mix.
And with regard to the list price, with the exception of a few prime locations, we look for approximately 259 up to -- 259 for first tier cities list price and 219 for second tier city list price and up to 189 for third tier city list price.
Eddie Leung - Banc of America
And I also have a question on the competitive landscape -- with the economic recovery in sight, should we still expect any consolidations in the economic hotel pieces? Because in the past during the downturn, there has always been the expectation that there will be some consolidations within the industry, which will help the leaders like Home Inns but with the economic recovery, do we still expect this to happen?
David Sun
Regarding the competitive landscape, I think today we are a very clear leader in what we call the China economy hotel sector and also we believe that by the slow down in China, our slow down economy in the past nine months, we have strengthened the relative competition position because of the market issue and also the [inaudible] issue, so I think that will give us a very good release and also very soft [inaudible] in the competition in the property collection.
Regarding the consolidation, I think first of all we believe that market is still very huge and also we do have ability to grow ourselves by the organic opportunities but anyway, we will keep an eye on what do you call the market and also see any good opportunity for the consolidation but meanwhile, we are still very focused on organic. Thank you.
Eddie Leung - Banc of America
Thank you.
Operator
Our next question will be from [Lin Ho] from Morgan Stanley.
Lin Ho - Morgan Stanley
I noticed that -- the first question is that your [inaudible] utility costs in Q2, I noticed that actually declined from Q1. Can you explain why that is the case?
May Wu
This is largely because of the lower number of hotels under construction during the second quarter. As pre-opening costs mostly includes rental expenses as we need to recognize rental expense once we start construction on the site. In the first quarter, we recognized -- in the expenses that we recognized, there were about $21 million pre-opening expenses and in the second quarter, it was only $10 million. Now in both of those figures, about 80% of those expenses were rental expenses, so that attributed to the decrease in rental expense in the second quarter.
Lin Ho - Morgan Stanley
I see. Very clear. Thank you. And my second question is what are your anticipations for room rates for ADRs in Q3 in a year-on-year basis and also a Q-on-Q basis?
David Sun
I think it’s based on today’s market. We see that the market is getting gradually stable and improving but we don’t want to give too much adjustment in ADR, so we believe based on today’s condition, it’s very stable by third quarter and second quarter.
Lin Ho - Morgan Stanley
Okay, thank you and the last one is regarding your guidance -- you have raised your guidance for the full year and can you share with us the assumptions you used behind this?
May Wu
Yes, as we have already been through the first half of the year and we see that both in the first and second quarter we either came in at the high-end of our own expectation or in the case of second quarter, we exceeded our internal plan, so we believe it’s appropriate to adjust the full-year guidance as well.
Looking into the second half, as you may recall, third quarter of last year was when we experienced the Olympics so overall our REVPAR benefited from the higher pricing in Beijing but was offset by the lower occupancy nationwide. So third quarter was kind of the beginning of some sign of slowdown.
And then the fourth quarter of last year was when we more fully felt the impact of the economic slowdown, so looking into the second half, we are expecting a kind of flattish third quarter REVPAR comparison and then in the fourth quarter, we are hoping that there will be at least flat to some pick-up.
Lin Ho - Morgan Stanley
Okay, I got it. Thank you very much.
Operator
Our next question will be from Marisa Ho from Credit Suisse.
Marisa Ho - Credit Suisse
Good morning. Congratulations again on an excellent set of results. When you think about your possible re-acceleration in growth plan in 2010 and into 80 to 100 leased and operated hotels, what type of performance from your existing hotels do you think you need in order to maintain at least stable to improving margins on a year-on-year basis?
May Wu
Well, this year we’ve said that given the moderate growth, even if REVPAR was down in the mid-single-digit range for the full year, we expect margin to be flat compared to last year and now we are seeing kind of slightly better than that. And going into next year, if we assume the -- if we think the economics will continue to improve slightly, we believe a kind of in the 80 to 100 unit growth type of growth will allow us to at least maintain a stable margin. And if the economy recovers even more, if let’s say this quarter occupancy overall was in the 92% range and in the past, we’ve achieved 95% or even higher, if that happens of course that will benefit us but if anything -- any slow-down happens again, if our occupancy goes back to high 80s, then certainly our margin will be hurt.
Marisa Ho - Credit Suisse
Right. And also to follow-up on your comment about your new banking facility, could you tell us more about that please?
May Wu
Previously we’ve always had revolving bank credit facilities on one-year terms from multiple banks within China. Because of our good performance and good credit that we -- and relationship we’ve developed with the banks over the past few years, we were not only able to secure additional amounts but we were also able to extend those terms to two to three years, which gives us more flexibility. And it’s not from one bank, it’s from a few large banks in China.
Marisa Ho - Credit Suisse
Right, so the new facilities, are those in a revolving facility or do you need to draw down the loan for a term loan at the beginning?
May Wu
It’s on a negotiable basis with the banks but there’s no specific requirement as opposed to how much we need to draw down in the beginning.
Marisa Ho - Credit Suisse
Okay, excellent. Thank you.
Operator
So at this time we have no additional questions. Ladies and gentlemen, we would like to thank you for joining this conference call. Actually, we have one more question from Chris Zi.
Chris Zi - Analyst
Good morning. Congratulations once again on a very strong set of results. I just have several follow-up questions. As of the end of June, you have 547 hotels all together. Can you just give us some color in terms of how many hotels do you plan to open both on the leased and operated hotels and the franchised hotels by the end of the year? That’s the first question.
My second question is regarding your -- the [CB]. There’s about 480 million outstanding on your balance sheet. Do you continue -- should we expect you to continue to retire part of the 480 or are you pretty happy about the position right now?
May Wu
With regard to the hotel openings, we mentioned that our plan is to open 65 leased and operated hotels for the year and 65 to 85 franchise for the year so we’ve already opened 43 of the 65 leased and operated hotels with 22 more to go in the second half. And then with regard to the franchise hotels, we’ve opened 33 out of the 65 to 85, so the second half we expect to open anywhere between mid 30s to 50 franchise hotels. But again, the franchise hotel timing is a little more difficult to control compared to the leased and operated hotels and hence the wider range that we gave.
With regard to the convertible bond, we will still look for opportunities to retire the bond at -- in a reasonable price from time to time but we do not have -- you know, they are puttable to us not until the end of 2010, so it’s still quite some time before it’s totally -- before we completely retire them, if that will be the case.
Chris Zi - Analyst
Okay, understood and I just have several follow-ups on the cost side -- we saw the sales and marketing as well as the SG&A expenses came down as a percentage of the revenue. Should we expect this to continue for the rest of the year?
May Wu
The sales and marketing costs, we expect it to pick up slightly in the second half. Overall sales and marketing expense is a very small portion of our costs, standing at less than 2% of our revenue all the time and there will be some quarterly fluctuation.
For the SG&A, it will continue to grow at well but just at a slower rate compared to our revenue growth, so we should expect continued G&A cost ratio improvement going forward.
Chris Zi - Analyst
Okay. One last question for me is the ADR, average daily rates -- you mentioned part of the reason is because it is a blended figure, so it includes more of the second tier hotels, so hence diluting the figure overall but if we compare like for like, just only comparing first tier cities against first tier city on a similar period, and again doing the same exercise for the second tier cities, are we seeing moderation or are we still seeing a decline?
May Wu
The ADR, if you look at our mature hotel ADRs that we disclosed, it was also down from a year-over-year basis and there are two reasons that attributed to that. First of all, our mature hotels are more -- more of our mature hotels are located in larger cities, which are actually slower to recover at this time. Now the ADR decline from 180 same period last year to 171 this year of those mature hotels was caused by two things -- one is last year those cities were the best performers, so we raised prices more in those cities and we were rolling back some of those price increases. And secondly in a more tough economic condition, we are more cautious in our marketing and sales method, so there is some change in customer channels this time of the year versus last year. For example, walk-in only represented about 10% of our customer base in the second quarter while it represented almost 15% a year ago. Walk-ins had the highest -- we charge the highest price for walk-ins but in a time of uncertainty, we’d rather secure more reserved rooms, so things like that also impacted our ADR.
Chris Zi - Analyst
Okay. Understood and that’s all I have.
Operator
Thank you. At this time, we have no additional questions. Ladies and gentlemen, we thank you for joining and have a good day. You may now disconnect.
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