Home Inns & Hotels Management's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Home Inns (HMIN)

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

Q4 2013 Earnings Conference Call

March 12, 2014 9:00 p.m. ET

Executives

Johnny Wang – IR Director

David Sun – CEO

Huiping Yan – CFO

Analysts

Justin Kwok – Goldman Sachs

Lin He – Morgan Stanley

Jamie Zhou – Macquarie

Tian Hou – T.H. Capital

Yaoxin Huang – CICC

Operator

Ladies and gentlemen, thank you for standing by for Home Inns Group's fourth quarter and full year 2013 earnings conference call.

[Operator Instructions] Today's conference is being recorded. If you have any objections, you may disconnect at this time.

I'd now like to turn the call over to your host for today, Mr. Johnny Wang, Home Inns Group Investor Relations Director. Please go ahead.

Johnny Wang

Thank you, [Carol]. Hello everybody and welcome to our earnings conference call.

Our fourth quarter and full year 2013 earnings results were released earlier and are available on the company's website. In addition, we have posted a slideshow presentation on our website which you can download and use to follow along with today's call. We had completed Motel 168's integration as of the third quarter of 2013 and ceased to present separate operating metrics and revenues for Motel 168 hotels.

With us today are David Sun, our Chief Executive Officer; Huiping Yan, our Chief Financial Officer; and May Wu, our Chief Strategy Officer, who will be discussing our performance for the past quarter and full year of 2013. After their prepared remarks, David, Huiping and May will be available to answer 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 Group 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 at Home Inns Group's Investor Relations website at english.homeinns.com.

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

David Sun

Hello everyone and thank you for joining us today to discuss our fourth quarter and full year 2013 results.

We delivered satisfactory overall results for the full year and achieved four consecutive quarter margin expansion in 2013. In summary, we exceeded our new hotel opening target for the year, driven by our brand value and strong demand from the franchise and managed business. We met our revenues expectation for the group despite challenging market conditions. Mature sales performance remained stable and operating metrics were in line with our expectations.

Motel 168 hotels continued to deliver solid year-over-year improvements as we continued to develop the brand and enhance its operational efficiency. Successful acquisition and integration of Motel 168 provided valuable experience and resource capabilities which became our unique advantage in the future.

We accomplished structure transformations towards high mix of franchised and managed hotels to build a strong pipeline for 2014. We remained disciplined in cost control and continued to implement productivity enhancement initiatives across the business. We achieved 2.9 percentage points again for the fourth quarter of -- again for the fourth quarter and 2.3 percentage points increase for the full year in adjusted EBITDA margin rate. Last but not least, the company closed the year with positive free cash flow.

On a more detailed look at our operational results, in the fourth quarter, group occupancy rate increased to 84% from 83.8% year over year. And ADR decreased slightly year over year to RMB163 from RMB165, resulting in a decrease of 0.7% in RevPAR, to RMB137 from RMB138 a year ago. This set of results was reasonable to consistent with our expectations amid weak macro conditions with no clear signs to recover.

There were 1,553 hotels in operation for at least 18 months in the fourth quarter of 2013. These mature hotels maintained a flat ADR year over year at RMB166. This favorable performance was attributed to a 5.5% or RMB7 RevPAR improvement by Motel 168 hotels, offsetting the slight decline of 0.2% or RMB3 in RevPAR by mature hotels of the core brands.

Let me give you an update of our vintage hotels utilization program that we are launching in the second quarter of 2013. As of December 31, 2013, a total of 88 hotels, or approximately 10,600 rooms undergone modernization upgrades.

Aside from positive customer feedback, comparative performance analysis confirm overall improvement in RevPAR, and we are pleased with the progress and the result so far. As we plan -- we plan for a reduced number of leased and operated hotels open each year, a portion of our capital spending will be allocated to an ongoing program and enable our aging hotels to remain vibrant and fresh to deliver value to our customers.

One of our key transformations in 2013 was with our franchised and managed business platform [ph]. Franchised and managed hotels became the majority of our total number of hotels during 2013. We started [indiscernible] build our franchised and managed business operation in 2007. Throughout the years, internally, we built up our brand, established the franchised and managed hotels operation track record, won increasing trust from -- by our franchisee partners, and maximized their return on investment, formed a franchise community -- franchisee community with a high repeat rate.

Meanwhile, the external environment has also changed. The increasing -- the increase in [indiscernible] cost added pressure against our return on investment requirements for the leased and operated hotels model. More entrepreneurship liquidity were present with a few good investment opportunity in China contrast what franchised economy hotels can deliver. Further, we see visible and ample growth opportunity in economy hotels sector in China, as well as the sufficient coverage by our leading leased and operated hotels in low-tier, smaller economics. Focusing on unit expansion with franchised and managed hotels is a natural expansion of our growth strategy.

Absent systematic price increase and with the smallest revenue growth in 2013, the company achieved consecutive quarterly earnings and profitability increase. One of the key drivers was the transformation to the increasing contribution by our franchised business.

At the end of the fourth quarter, franchised and managed hotels represent 60% of our total hotels in operation. And over 80% of pipeline currently was franchised and managed contracts. The growth strategy focusing our franchised and managed hotels model is well established and will be consistently executed [ph] going forward.

As we know, to manage successful global hotels in mature markets, we found ourselves traveling down a similar path of growth and value creation. Accelerated incremental enterprise value is achieved as the business became increasingly asset light [p] with gradual leverage on management knowhow, network and the brand value.

We believe the power of the brand value is represented by the diversity in its offering. Our midscale Yitel brand strategy, focusing on meaningful differentiation, unique value delivery, accurate market position, and optimal timing of expansion, and rich management knowhow and accelerate return of investment.

We opened 11 new Yitel hotels in 2013, including seven leased and operated Yitel hotels. By the end of 2013, we had 18 Yitel hotels, located across nine tier 1 provincial capital cities. Given the proven performance and operational experience so far, we have started introducing non-leased and operated hotels business model in response to strong interest from potential franchisee and joint venture partners for further Yitel development. We plan to open 20 to 25 new Yitel hotels in 2014, and we will further accelerate this network expansion in 2015.

Regarding our guest program and development planning, we continued to see our membership grow as a result of the increasing brand value and operational excellence. At the end of 2013, our frequent guest program had reached a record high of 16.9 million unique active non-corporate members, an increase of 42% compared from 11.9 million at the end of 2012.

For the full year of 2013, we opened 437 new hotels, adding 77 new leased and operated hotels and 360 new franchised and managed hotels. At the end of the year we have 417 hotels -- hotel projects in the development pipeline, which include 161 hotels contracted, all under construction, and another 256 hotels under due diligence. Two hundred ninety-three or 94% of these projects are for the franchised and managed hotels.

A few days ago, we announced the sign of the legal binding memorandum of the understanding to acquire 100% ownership of Yunshang Siji Hotel Management Company, which operate 27 leased and operated hotels and eight franchised and managed hotels, with approximately 3,500 rooms in total. Upon successful closing, this acquisition will enhance the value and geographic diversity of the Home Inns hotel brand and support our strategic expansion in the southwest region of China. This transaction, like any other potential regional chain acquisitions that may be -- may come forth will be a part of our overall investment plan and capital budget for the year.

Now, the outlook of 2014. Based on what we have seen so far in the first quarter of 2014, we believe short-term challenges still remain. There are no clear signs to -- of meaningful recovery in the macro conditions. And the recent events of public safety and security concerns cast further shadows on this segment.

At times of such market uncertainties, however, we take comfort in the company's underlying business [ph] structure and the cost-conscious culture to -- again, focusing on what we can control.

The following remains our three area of focus. One, stay customer centric. Two, improve management efficiency. And three, develop our people. Allow me to elaborate a little bit.

As the company grew and size of our brand value increase, it is crucial for a brick-and-mortar business like us to stay relevant. Consumer habits are impacted by increasing mobility, social media and the network at great velocity. We started and will continue to enhance our product and service offering with expanded business progress beyond the four walls of hotels, to bring fresh experience and added value, to satisfy desire for variation in choice, speed and efficiency in product and service with incremental value.

Free Wi-Fi coverage at our hotels and a feature-packed smartphone apps for booking, payment and guest community feedback and survey were just a few of what we have spent resource on during 2013. Most of these above changes require us to revamp ourselves and become even more progress oriented, information driven, and analytical on technology saving [ph], all the while maintaining the level of personalized attention to our customers.

We are learning to be smart and managing the day to day of our vast network of hotels with great position, effectiveness and efficiency. To achieve better management efficiency, we must improve the quality and the capable of our people.

Building on its past success, Home Inns Academy has new initiatives to educate and re-educate our people. Internal training program has been redesigned and delivered with great coverage and speed. It delivered trainings of approximately 8,000 accumulated attendance for mid-manager level in 2013 alone.

In addition, five regional technical schools in China are providing hospitality curriculums [ph] tailor-made to Home Inns' economy hotels as part of the enterprise school co-op initiatives. So far nearly 300 of such students have been enrolled in these programs and over half of these young talents have entered into our workforce.

In conclusion, the road ahead may continue to be challenging for the near term. We are, however, confident in our preparedness to continue to grow and increasing value creation, even the structure transformation we have accomplished, our multi-brand capabilities and a network of stable product and service, with innovative delivery, our ability to manage the cost and again the productivity, with a stable and a gradual improved market environment, we expect a modest rate of revenue increase, yet accelerate earning growth, productivity expansion -- sorry, profitability expansion and cash generation, has ultimately added value for our shareholder.

Before I turn the call to Huiping to financial, I want to comment on her departure from Home Inns. On behalf of the company and the Board, I want to express our appreciation for Huiping's contribution in the past five years. The company will leverage and continue to build on her institutionalized knowledge of financial management for continued future success. We respect her professional decision and wish all the best for her.

Huiping.

Huiping Yan

Thank you, David. Thank you everyone on the call. Let me say that I'm equally appreciative of the opportunity and experience I had with Home Inns, all of which I will sure be looking back with great fondness. I greatly admire the exceptional leadership team here at Home Inns, and believe the company will accomplish even greater things in the future.

If you'll now allow me to go through the financials with you. I will take you through the numbers in RMB terms unless specifically noted. In addition, I will mainly focus on non-GAAP or adjusted measures in the interest of time throughout this presentation because we do believe these results better reflect the underlying business performance and results.

On revenue, we delivered steady revenue growth and our group gross sales were in line with our expectations. For the fourth quarter of 2013, total revenue were RMB1.61 billion, increasing 9.8% year over year. For the full year, total revenues were RMB6.35 billion, increasing 10.1% year over year.

Revenues from leased and operated hotels for the fourth quarter were RMB1.4 billion, a 7.4% increase year over year. For the full year, leased and operated revenues were RMB5.59 billion, an 8.2% increase year over year. Total fourth quarter revenue for franchised and managed hotels were RBM208 million, an increase of 29.4% year over year. For the total year, franchised and managed hotel revenues were RMB765.5 million, an increase of 26.5% year over year.

These year-over-year increases in revenues were mainly driven by an increase in the number of hotels in operations, as well as the stable performance of our core matured hotels.

Total non-GAAP operating costs and expenses for the fourth quarter were 86% of total revenue, compared to 88.6% in the same period a year ago. And for the full year, was 84.2%, in 2013, compared to 86.1% in the same period of 2012. These decreases in the expense ratio resulted from continued benefits from hotel-level efficiency gains and ongoing cost control focus across the company including headquarter operations.

Now a little bit more breakdown on the costs here. Total adjusted leased and operated hotel costs for the quarter were 88.6% of the leased and operated hotel revenue in the fourth quarter, compared to 91% in the same period a year ago, or 86.7% for the full year, compared to 88.1% for the full year of 2012. Again, these year-over-year decreases in total leased and operated hotel cost as a percentage of leased and operated hotel revenues for both quarter and the year were mainly due to continued productivity gains, more specifically at personnel cost level at the hotel operations, and particularly so, including Motel 168 portfolio.

Pre-opening costs included in the leased and operated hotel costs was RMB13.5 million for the fourth quarter of 2013 and RMB77.9 million for the full year of 2013, compared to RMB26.8 million and RMB104.2 million, respectively, for the same period a year ago.

Adjusted personnel cost of franchised and managed hotels was 14% of franchised and managed hotel revenues in the fourth quarter of 2013, compared to 13.8% in the same period a year ago, and 19.1% for the year, for 2013, which remained the same from a year ago.

Adjusted sales and marketing expenses for the quarter was RMB29.1 million or 2.9% of total revenues for the quarter, compared to 1.7% in the same period a year ago; and for the full year RMB146.3 million or 1.7% of total revenue, compared to 1.3% in the same period a year ago.

The increase in this cost included branding and marketing programs for mobile app development and implementation in support of Home Inc. Group's multi-brand strategy and the increased costs associated with Company's member rewards program. The company's ongoing market -- sales and marketing efforts remained cost effective in order to support steady revenue expansion.

Adjusted general and administrative expenses for the quarter was RMB66.4 million, or 4.1% of total revenue, compared to 4.5% in the same period for 2012. For the full year, it was RMB246.6 million or 3.9% of total revenue, compared to 4% for the same period a year ago. The decreases in this expense ratio in the quarter and the full year were driven by effective cost control initiatives at the headquarters, with continued leverage of economy of scale.

The above discussed income and expense items resulted in adjusted income from operations of RMB127.2 million or 7.9% margin rate, and compared to RMB79.2 million or 5.4% margin rate for the same period a year ago. For the full year, the equivalent measure was RMB625.6 million or 9.8% margin rate, compared to RMB464.1 million and 8% margin rate, respectively, for a year ago.

The respective increases in margin rate for both quarter and annual were mainly driven by the increase in revenue contribution from franchised and managed operations, continued operational improvements from Motel 168 during and after integration conclusion, and meaningful control on costs and gaining savings and productivity at both hotel and corporate headquarter level.

EBITDA, in itself a non-GAAP measure, was RMB254.9 million for the fourth quarter, a margin rate of 15.8%, compared to RMB188.2 million or 12.8% of total revenue a year ago. Full year EBITDA increased 37.7% to RMB1.17 billion or 18.3% of total revenue, from 14.7% a year ago.

Adjusted EBITDA, again a non-GAAP measure, for the fourth quarter was RMB333.9 million or 20.7% of total revenues, compared to RMB260.5 million or 17.8% of total revenues in the same period of 2012. For the full year of 2013, adjusted EBITDA increased 23% to RMB1.39 billion or 21.9% of total revenues -- or 19.6% of total revenues compared in the same period of 2012.

Net income attributable to shareholders for the fourth quarter of 2013 increased 105% to RMB12.9 million, from RMB6.3 million in the same period of 2012. For the full year, net income attributable to shareholders was RMB196.2 million, compared to a net loss of RMB26.8 million in the same period of 2012.

Adjusted net income attributable to shareholders was RMB91.8 million for the fourth quarter of 2013, compared to adjusted net income of RMB80.6 million in the same period of 2012. For the full year of 2013, adjusted net income attributable to shareholders was RMB422.8 million, compared to RMB300.3 million in the same period last year.

Diluted earnings per ADS for the fourth quarter of 2013 were RMB0.27 or $0.04. For the full year, diluted earnings per ADS were RMB4.2 or $0.69. Adjusted diluted earnings per ADS for the fourth quarter of 2013 were RMB1.91 or $0.32. And for the full year, adjusted diluted earnings per ADS were RMB8.83 or $1.46.

Now turning to operating cash flow. In the fourth quarter of 2013, the company generated a net operating cash flow of RMB276.8 million compared to RMB271.7 million in the same period of 2012. Capitalized expenditures for the fourth quarter was RMB320.6 million while related cash paid for capital expenditures during the quarter was RMB271.4 million.

For the full year, net operating cash flow was RMB1.19 billion compared to RMB747.8 million in 2012. Capitalized expenditures for the year of 2013 were RMB929.5 million while related cash paid for capital expenditures was RMB897.5 million.

As of December 31, 2013, the company generated positive free cash flow. At the end of the year, Home Inns Group had cash and cash equivalents of RMB1.16 billion. The outstanding balance of convertible notes issued in December of 2010 measured at fair market value was RMB1.16 billion. The outstanding balance of the U.S. dollar denominated three-year term loan due in June of 2016 was RMB713.3 million.

Now, turning to our outlook. We expect to open no less than 450 new hotels in 2013, including 70 to 90 leased and operated hotels and 350 to 380 franchise managed hotels. Twenty five to 30 of these hotels will be Yitel brand. Also note that acquisition of smaller-scale regional chains are to be accounted towards the overall development plan described above.

For the full year of 2014, Home Inns Group expect total revenues for the Group to be in the range of RMB6,800 million to RMB7,000 million, representing a growth of 7% to 10.2% over 2013. Total revenues for the group in the first quarter of 2014 are expected to be in the range of RMB1,460 million to RMB1,490 million.

Now this concludes our prepared remarks and we will now open the lines for questions. Operator, please?

Question-and-Answer Session

Operator

Thank you very much. [Operator Instructions]

Our first question comes from the line of Justin Kwok from Goldman Sachs. Please ask your question.

Justin Kwok – Goldman Sachs

Good morning. Thanks for taking my questions. Maybe I will just shed off three different questions. The first one is related to the revenue guidance and also the RevPAR. In your current set of revenue guidance, what kind of same-store or same-hotel RevPAR growth that you are putting in and what have you been seeing in the first two months of the year? That's my first question.

Huiping Yan

Okay. Thank you, Justin. The revenue guidance and for the first quarter reflects our current experience in the marketplace. As you know, we are well into the first quarter. The overall sentiment and also the overall condition of the market remains weak. So based on those current experience and a stable expectation -- an expectation of stable market environment, we have prepared our overall estimate for the year.

Now one thing I do want to re-highlight is that the recent events of public safety and security concerns that David mentioned has indeed impacted, and at least that's what we've seen, in our day-to-day operations in the marketplace, that people are indeed concerned. So the volume of the travel is further dampened in that way.

RevPAR overall for the year we believe will be flattish and down based on the current view. Our same-hotel revenue is still targeted to hold flat, and at least that's how it goes. So with that, we have derived at our overall revenue guidance. I hope that answers your question.

Justin Kwok – Goldman Sachs

Thanks for the color. And maybe the second question is about the margins. The company has done very well in the past year, and what will you be guiding or looking into the 2014 in terms of this trend?

Huiping Yan

Sure. Now while we don’t give specific guidance on the margin, we want to reiterate that the underlying business structure will support a continued margin expansion possibility, especially because of the overall structure established for franchise business mix. And as we mentioned, we are on the path of following the global hotelier business model with an increasing franchise business mix currently at 60%, it could go as high as 80%, 90%, a trend for us to look for business to go towards. The underlying revenue -- the underlying profit margin increases will be steady.

And in addition, for the company, we have established the cost control culture. And the mechanism that are currently in place will continue to generate productivity gains. And we are also diligently preparing for the future to further be adding the effective cost control measures. So with that in mind, we believe that the drivers that help us achieve quarter-over-quarter margin expansion are still in place and will be at play going forward.

Justin Kwok – Goldman Sachs

Okay. Thanks for this color.

And I guess the last question is about the free cash flow, in a way that in 2013 the company has turned free cash flow positive again, and I believe the trend is ongoing to 2014 and also 2015. What kind of magnitude are you seeing? And what is the company's current plan of deploying these cash in the coming one or two years in terms of whether you are more inclined to do debt payout or more acquisitions? What kind of planning do you have in mind? Thanks.

Huiping Yan

Sure. The CapEx for 2013 came in close to RMB900 million, and we have expected, based on current development plan, for 2014, will be close to RMB1 billion. So that is what we have previously -- that's consistent with what we have previously talked about. The CapEx spending will be stable, including deploying cash to revitalize our vintage hotels.

Yitel development, as we talked about that, we will be open -- a level of leased and operated hotels, but we have already opened up the non-leased-and-operated business model, which will put less pressure on the capital. Again that's part of the overall capital planning.

And then the overall lease and franchised hotel mix in our overall new opening guidance is a good indication that we will be -- continue to focus on the franchised open in the leased and operated hotels budget, including acquisitions of the regional chains, will be all part of the capital planning. So with that, we believe with the strong underlying cash generation capability of the total portfolio, we expect free cash flow to continue to grow.

For the planning of what we use -- what we have for the excess cash, again as we talked about, we are again looking at the dividend policy as early as 2015, and we are also open to various other venues to enhance our shareholder value such as share buyback at the appropriate time and also dividend certainly is part of the planning. Thank you.

Justin Kwok – Goldman Sachs

Okay. Sorry, just one quick clarification, the RMB1 billion CapEx you mentioned in 2014, does that include or exclude the recent purchase of the Yunshang chain at RMB230 million?

Huiping Yan

It includes. So in other words, our growth will be organic and inorganic for that spending of about RMB1 billion.

Justin Kwok – Goldman Sachs

Okay, thanks. That is clear. And wish you every success in your next endeavor. Thank you.

Huiping Yan

Thank you, Justin.

Operator

Thank you very much.

Our next question comes from the line of Lin He from Morgan Stanley. Please ask your question.

Lin He – Morgan Stanley

Hi. Good morning everyone. Thanks for taking my question. My first question is regarding the store closure number you disclosed in the earnings release. Can you talk about on the license renewal front, how many license -- how many lease you have renewed last year and what is the expected number for 2014?

Huiping Yan

Sure. Without going to specifics, we want to reiterate what we have all along talked about, that the company's business portfolio was over 2,000 hotels, we do run into closures because of local rezoning. Now, mind you, we are close to 290 to 300 cities across China, and China itself is still going through urbanization, a lot of city development. So we do run into the closures that are not within our control.

For the lease renewals that -- for the lease that we signed in the earlier years, they will gradually come in -- come up for renewal, and they are, again, the term I could use is trickling in. We're not at a stage where a concentrated lease renewal will take place yet. It will be a few years far from here.

So with that, we think that the similar level, if I may, of closures will take place and mostly will be driven by the rezoning.

Lin He – Morgan Stanley

Okay. So I guess for the lease you did renew last year, what is the rental increase you have seen?

Huiping Yan

Good, very good question. Now when we look at the lease renewal, we look at the price on the room that we could charge, as well as the lease burden that we will take on. And the equation is really straightforward. If we are continuing the capability of positive cash flow at that particular project, we will renew. And then if indeed the rental cost is not suitable or it doesn't work out for us to continue to run it as a leased and operated hotel, then we have other options.

For example, the franchise options. The owners of the property, in many cases, would receive better return of being a franchisee as opposed to landlord. We are also looking to see that potentially some of the locations, if the property condition itself is suitable for a midscale product, then we would apply that as well.

Lin He – Morgan Stanley

Okay, got it. Last question for me is, can you give us a little bit more color on the performance of the Yitel last year? How is that running compared to your early expectations? Thank you.

Huiping Yan

Yitel's performance has been very much within our expectation and in some locations exceeded our expectation. We added 11 new hotels, of the total 18 right now, we look to the performance of the stabilized hotels. Their occupancy rates are all 80% and plus even in the soft environment. And the like-for-like were also improving the same-hotel group for matured Yitel, is achieving 90% plus occupancy rates. So again this business model and operational experience has been proven and established and that's why we wanted to look to the market to accelerate the expansion of Yitel.

Lin He – Morgan Stanley

Got it. Very helpful. Thanks, Huiping, and wish you all the best in your new position.

Huiping Yan

Thank you.

Operator

Thank you very much.

The next question comes from the line of Jamie Zhou from Macquarie. Please ask your question.

Jamie Zhou – Macquarie

Hi. Thanks for the opportunity to ask a question. First one is on the follow-up to the RevPAR guidance, given earlier on the call, being flattish to slightly down on a blended level. I see that in your most recently reported mature hotel RevPAR that the blended flat RevPAR is actually coming from a positive contribution of Motel 168 but a negative 2 percentage drop from Home Inns' core brand. Can you give us a breakdown for the FY14 outlook on what are the two sub-brand performance each? That's my first question.

Huiping Yan

Sure. Indeed we look to Motel 168 as a -- the integral part of our overall economy hotels. Now Motel 168, as we mentioned, will continue to improve even post-acquisition integration conclusion and we are seeing that trend continue. Now, mind you, I think realistically speaking, because of the integration itself is more specific and targeted and we are, while still improving Motel 168, the improvements will be slightly trending down, and that is reasonably to be expected. But Motel 168 should still see at least 1% to 2% improvement on its RevPAR as we also look to further cross-opportunities at that portfolio.

Jamie Zhou – Macquarie

I see. And then my next question is on -- was mentioned earlier, on the regional chain acquisition strategy. First part of my questions is the most recently acquired Siji Hotel Group. What is the approximate EBITDA for FY13 and what is the forward EBITDA for FY14, if you can share that with us?

And my second part of the question is, if we will continue to pursue such strategy of acquiring local regional chains, what is the integration plan? Are we keeping the original brands or are we going to take the opportunity to integrate it into our existing brand of -- existing portfolio of three brands? Thanks.

Huiping Yan

Sure. A very good set of questions. On Siji, once the acquisition is concluded, we of course will provide even more detail about the business. But overall the comment is that the business currently is running at a very healthy EBITDA margin that will be accretive to our total business. And some of the key locations in the Yunnan province are -- has very prominent real estate position and generating very positive earnings.

If we look at the overall acquisition strategy, we -- as it comes to local regional brands, we will be mainly looking at a replacement-- from a replacement cost perspective, i.e. how much it does it take us to develop a hotel versus how much we would spend on per room for acquired entity. And then of course it's all in the overall picture and planning for strategic development, it's not everywhere, anywhere. It's targeted cities that we focus our growth penetration effort on.

And for as far as the brand, in some cases, again I'm speaking about strategy, because of the local chain operation is very prominent, it has a good local customer base and following, we would choose to co-brand, in other words, for Siji, for example, we would make it Home Inns-Siji to continue to maintain its unique advantage in that particular market.

And in other cases, depending on the scale and the customer base and the local awareness, we may choose to completely do away with the existing brand.

Jamie Zhou – Macquarie

Okay, understood. That's very helpful. Thank you. All the best, Huiping.

Huiping Yan

Thank you.

Operator

Thank you very much.

The next question comes from the line of Tian Hou from T.H. Capital. Please ask your question.

Tian Hou – T.H. Capital

Yes, good morning, management. I have a couple of questions. One is still related to your acquisition of Yunshang Siji Hotel. And I wonder if compared with your last acquisition of Motel 168, would you see in this hotel, you know, what kind of values does that hotel added to you? And what's going to be the difficulty or procedure and potential challenges of integrating this hotel? That's my first question. I will follow up with the second.

Huiping Yan

Sure. The short answer is it will be much easier. First of all, the scale is different. And then two, it's a much well-run business compared to the starting point of Motel 168 when we first acquired it.

And then also we are -- it's more like a bolt-on for us, if you will. For the regional development strategy that we have, it will be immediate enhancement to our presence in those markets in the southwest region of China.

Integrating challenges, of course there will be integration challenges but certainly to a lesser extent if you want to compare to Motel 168. Again, reiterate what David had mentioned before, we chewed a big [indiscernible] if you will, is if you allow me to use that term, the overall integration of Motel 168 has afforded us very valuable experiences and resource capabilities. And of course without being complacent, we will of course do our diligence homework and also compete the integration plans and execute the integration plan. But I should say that is much easier compared to the acquisition of Motel 168.

Tian Hou – T.H. Capital

That's very helpful. And regarding your opening plans for 2014, so among total 450 new hotels, and I wonder how many are under each of your brands like, Home Inns organic motel and other brands. And that's the second.

And the third question is related to your mobile strategy. So I wonder, what's the investment going to look like for 2014 to increase in the mobile adoption of Home Inns' reservation system?

Huiping Yan

Sure. For the first question, of the no less than 450 hotels that we will be opening, we talked about 20 to 25 will be Yitel brand. And then the two economy brands that we have, if I may take this opportunity to go over our strategy, Motel 168 with its current presence, we believe there are a lot more opportunities for us to use Motel 168 to further penetrate the existing market that were -- with significant or sufficient presence with our core Home Inns hotels.

And yet these markets still present ample growth opportunities. So we will be focusing on the development of motel, hotels in those regions to solve or to counter the effect of cannibalization, if you will. And then in the new areas of Motel 168 potential market expansion, is that we will be also looking to use Motel 168 to form a connected and integrated network for itself to develop its brand value and awareness.

On the third question, is the mobile -- well, let me add more on the second question. So it will be with inclination or weight on the mobile -- on the Motel 168 planned deployment versus the Home Inns core brand.

The third question, about our mobile effort investment. Now David had talked about that the changing market economic landscape required us to stay up to date and stay relevant. So the investment in developing the mobile apps, enhancing its features, including on-the-spot payment as well as customer booking and feedback, all these offline and online experience enhancer will help us develop our market leadership position or strengthen our overall leadership position.

The mobile apps development spending that we have done in 2013, they were our initial -- the programming costs that went into it. But there is certainly maintenance expenditures and investment that we will see going forward. And also adding new features, again staying current and staying relevant, will require us to further invest.

And this is not just in mobile. We are talking about the social media, using the social, for example, WeChat, AliPay. All these features could be well integrated into our overall mobile platform. And that's the overall strategy that we wanted to take in further extending our business process to better serve our customers.

Now with that said, that the investment will be in place; however, from the financial perspective, our sales and marketing expenses in the past have been budgeted to be around 1.2 -- no more than 1.5% in certain quarters. Now with the added investments in the mobile apps, we are also able to eliminate some of the other more traditional sales and marketing expenses. So the net-net result will yield a somewhat of a 1.7% of revenue being allocated as the budget for sales and marketing expenses in 2014. I hope that satisfies your question.

Tian Hou – T.H. Capital

That's very helpful. And all the best, Huiping, and good luck on your new venture.

Huiping Yan

Thank you very much.

Operator

Thank you very much.

The next question comes from the line of Yaoxin Huang from CICC. Please ask your question.

Yaoxin Huang – CICC

Thanks for taking my question. It's just a follow-up on the question on the Yunshang Siji acquisition. I see Yunshang Siji can open some new hotels in Mingxia [ph], outside of Yunnan Province. So how would you deal with these hotels? I think that these hotels are making some losses, is it?

Huiping Yan

Sure. Very good question. Yes, indeed, we do look at the total portfolio. There are some lesser performance -- performing hotels outside of the Yunnan provinces, and because the majority, the 90% of the total portfolio is in Yunnan and are performing quite well. For those that are outside, I think it will be advantage for these hotels to be added into the Home Inns network, leveraging the existing Home Inns brand. So the likelihood of them being turned into a Home Inns without mentioning [indiscernible] will be the case. So again we will be leveraging our operational experience and the operational platform to bring up the performance of those hotels.

Yaoxin Huang – CICC

Thank you, Huiping. And could you tell us more about the valuation of this acquisition? I think if we look at the investment per room, I think it exceeds RMB50,000 [ph]. I think it's a little expensive. How do you look at that?

Huiping Yan

Now the cost of -- if I didn't catch the whole question, please repeat -- the whole -- the cost that we would spend on converting a hotel nowadays almost -- is about RMB65,000 to RMB70,000. Now if you roughly calculate the number of 3,500 plus rooms that we are able to acquire, it comes in somewhere around RMB70,000 to RMB72,000. And that's very close to our existing cost equation.

And the added strategic product or value is that it is a strategically well-located business. It adds our overall presence. So the slight premium, if you will call that, is very well-justified. And also I have talked about that it would not require as much investment to improve or to integrate the whole business into the Home Inns total portfolio.

And so we believe that the acquisition cost is very reasonable.

Yaoxin Huang – CICC

Okay, I see. Thank you, Huiping, and all the best for you.

Huiping Yan

Thank you.

Operator

Thank you very much. This is the end of the Q&A session. I will hand the conference back to the presenter, Ms. Yan.

Huiping Yan

Sure. Thank you, operator.

Now the business did guide a less moderate growth revenue, and I think this is a natural extension of the overall growth of our company, as David mentioned, that value is being driven by brand, by network presence, as well as our operational knowhow. The overall picture of the company is that even though with a somewhat decelerating revenue growth, we are expecting the margin and earnings expansion on a very steady pace. So the underlying structure is something that we are taking comfort in, in weathering the overall short-term challenges in the marketplace and also preparing ourselves to further propel into the future with a presence -- the market leadership presence and so the growth on the unit level is still well-maintained.

And we look to present the overall businesses and our thinking at the upcoming Credit Suisse conference in Hong Kong in just next week, and myself, David and May will also be present and ready to answer your further questions.

So thank you again for your interest and best of luck to you all.

Operator

Thank you very much. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may disconnect.

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