Leading budget hotel operator Home Inns (Nasdaq: HMIN) has just released its latest results that show continuing weakness at the China lodge, as operators take a double hit from the nation's slowing economy and a building boom that has led to overcapacity. Home Inns' latest results continue a trend from last month, when China Lodging (Nasdaq: HTHT), operator of the Hanting chain of budget hotels, announced similar preliminary results that point to a period of pressure on the sector that is likely to last for the rest of this year and quite possibly linger into the first half of 2015.
Home Inns shares briefly jumped in after hours trade after it published its latest quarterly results that showed it returned to the profit column at the end of 2013. But those gains quickly disappeared when the colder reality set in. Since the beginning of the year, shares of both Home Inns and China Lodging have lost about a third of their value, and the latest results show it could be a while before they return to their previous levels.
On a positive note, Home Inns did report that it returned to profitability in the first quarter of this year, posting net income of $12 million after turning in a $3 million loss a year earlier (company announcement). But the gloomier numbers came in revpar, an industry metric that combines room occupancy rates with room prices. Home Inns said its revpar for the quarter fell 3 percent to 131 yuan ($21) from 127 yuan a year earlier. That marked an acceleration from the fourth quarter, when revpar dipped slightly by 0.7 percent.
China Lodging reported similar trends when it issued preliminary results for the first quarter last month. It said its revpar for the quarter was down about 2 percent to 146 yuan ($24), from 149 yuan a year earlier. Both companies have tried to offset the softness with massive additions of new hotels to their portfolios, making the overcapacity problem worse.
The 2 companies certainly aren't the only ones engaged in a massive hotel build-out to cater to China's increasingly mobile middle class travelers. U.S. hotel giant Hyatt (NYSE: H) was in the headlines earlier this year when it announced it was bringing 2 more of its brands to China, meaning 6 of its 9 brands were now represented in the country (previous post). It added that it planned to open 20 more hotels in the country over the next few years, roughly doubling its current count.
Home Inns said it opened 69 new hotels in the first quarter and has another 448 in various stages of development, meaning it could boost its hotel count by nearly a quarter if all the projects are completed. The way things are going, the likelihood that all those new hotels will be finished looks slim, as China's booming real estate market shows signs of softening and consumers cut back on their spending due to the nation's slowing economy.
With all those signs of weakness in the air, the next 2 years don't look too bright for the hotel sector. The industry is notoriously cyclical throughout the world, and China is clearly revving up for its first major downturn after years of breakneck growth. In this case the coming downturn is likely to last for at least a year and possibly longer. While the prospects for individual company stocks don't look too good during that time, consolidation could start to accelerate that could see a new major player or two begin to emerge. Such a development could bring a bit of excitement to the market, as it waits for the next boom cycle to begin.
Bottom line: Home Inns' latest results show the industry's current downturn is accelerating due to overcapacity, and is likely to continue for the next 12-18 months.
Disclosure: No positions