Home Inns & Hotels Management's (HMIN) CEO David Sun on Q1 2014 Results - Earnings Call Transcript

May.13.14 | About: Home Inns (HMIN)

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

Q1 2014 Earnings Conference Call

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

Executives

Johnny Wang – IR Director

David Sun – CEO

May Wu – Chief Strategy Officer and Interim CFO

Analysts

Lin He – Morgan Stanley

Justin Kwok – Goldman Sachs

Ella Ji – Oppenheimer

Billy Ng – Bank of America Merrill Lynch

Jamie Zhou – Macquarie

Tian Hou – T.H. Capital

Operator

Ladies and gentlemen, thank you for standing by for Home Inns Group's First Quarter 2014 Earnings Conference Call.

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

I would now like to turn the call over to your host for today's conference, Johnny Wang, Home Inns Group's Investor Relations Director.

Johnny Wang^

Thank you, Annie. Hello everybody, and welcome to our earnings conference call. Our first quarter 2014 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.

With us today is David Sun, our Chief Executive Officer, and May Wu, our Chief Strategy Officer and Interim Chief Financial Officer, who will be discussing our performance for the past quarter. After their prepared remarks, David 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 first quarter 2014 results.

Despite continued challenging market condition in the first quarter of 2014, especially during the latter part of the quarter, we have maintained relatively stable hotel operation and achieved top-line performance, a top-line performance that is within our expectation. Meanwhile, we are able to deliver continued -- we were able to deliver continued year-over-year margin expansion for the fifth consecutive quarter, validating our business strategy and demonstrating the strength of our business model.

To sum up, some highlights for the quarter. We remained focused in -- we remained focused on our franchise growth strategy. And in the first quarter of 2014, we opened a meaningful number of franchised-and-managed hotels, as well as building a strong pipeline for all three brands with the company, with increase from both existing and new franchisees. We continued to benefit from effective cost control and productivity enhancement initiatives at all levels of hotels operations.

Our core mature hotels held their ground and recorded stable results, especially compared with industry trends in the challenging macro environment. Motel 168 continued to contribute positively to overall growth performance, and our Yitel portfolio continued to deliver strong operational results and raise brand awareness in the market.

We recently announced the closing of our acquisition of Yunshang Siji Hotel Management Company, and we are confident that we are -- we can drive significant performance improvements in this business unit by leveraging our management and operational expertise, and particularly our success experience integrating Motel 168.

With all these above facts, our cash flow remained strong, and we ended the quarter with RMB154.9 million operational cash flow and overall positive free cash flow.

Taking a closer look at our group operational results. Group occupancy rate was 81.3% in the first quarter of 2014, a decrease from 83.6% in the same period a year ago. ADR remained resilient at RMB156, resulting in a slight decrease in RevPAR to RMB127 from RMB131 in the same period a year ago. This set of operational results are in line with industry performance and within our expectations at the beginning of the year, particularly in the still challenging macro-economic environment.

There were 1,654 hotels in operation for at least 18 months in the first quarter of 2014. These mature hotels maintained a flat ADR at RMB157. RevPAR was down 2.2% year over year, driven by a 2.1 percentage points decline in occupancy rate, from 86% to 83.9%. The majority of the negative performance was recorded in the later part of the quarter. This was due for some extent to a number of external facts, including the Kunming attack and Malaysia Airline incidents.

While the macro environment and external events are out of our control, we continue to be keenly focusing our product refinements, customer service and staff productivity at all of our hotels across all our brands. Since the launch of our hotel cost utilization improvement program in the second quarter of 2013, we have achieved good progress, allowing us to hold relatively stable margin at our mature hotels, even with slightly negative RevPAR in the first -- a decline -- negative RevPAR in the first quarter, a remarkable achievement in China's relatively high inflationary environment.

In addition, it is important to highlight that this program has been carried out on the premise that service level and customer satisfactions must not be affect in any way. I'm pleased to say that continued positive feedback from customer confirms the success of our approach.

One of our key success and main driver for continued growth in our business and margin expansion in last few quarters was our strategic [ph] transformation into a predominantly franchised-and-managed hotel company. As of the end of the quarter, franchised-and-managed hotels represented 61% of our total hotels in operation, up from 56% from the same period a year ago and 60% as of the end of last year. Our development pipeline for franchised-and-managed hotels stands very strong at this time. And we are confident to achieving our overall target for hotel opening this year.

We continue to see strong interest and demand from existing and new franchisees partners across all three of our brands. This reflects the increasing value of our brand, of our brand recognition among new and existing partners who trust our operational philosophy and proven execution. This trust is built on our ongoing efforts to provide a support infrastructure for our franchised-and-managed hotels and to embed [ph] this mentality within our organization.

Over the years, we have developed and strengthened our capacity in all aspects of franchised-and-managed hotels business, including streamlined development process that utilize our extensive nationwide hotel network, support program during the pre-opening phase of new hotels, a complete range of franchise support function, including business planning, accounting management consolidation, and a comprehensive range of franchise relationship management activities. Thanks to our human capital development programs, we can effectively carry out all the daily management and operations of all of our franchised hotels. We are pleased to say that our investment in these parts of the business is paying off.

Growth in the economy hotels industry has been increasingly driven by the additional of franchised hotel units. Our strategic focus on these segments has enabled us to successfully capture this growth and translate this into better margin and profitability gains. We expect this trend to continue and that our business will benefit from it.

For the first quarter of 2014, we opened 69 new hotels, added six new leased-and operated hotels and 63 franchised-and-managed hotels. At the end of the quarter we have 448 hotels projects in the development pipeline, which include 185 hotels contracted and under construction, and another 263 hotels under due diligence. 95.5% of these projects are for franchised-and-managed hotels. That's demonstrating continuous strong interest from existing and new franchise partners.

In regards to our frequent guest membership program, we recorded a steady increase in our membership in the quarter as we continued to successfully leverage our brand and scale. At the end of the first quarter of 2014, our frequent guest program reached a record high of 18.2 million unique, active, non-corporate members, an increase of 38% compared to 13.2 million at the end of first quarter of 2013.

Let me give you some update on our social media and mobile apps, for booking, payment and customer feedback. Since we launched our mobile apps in October 2013, almost 800,000 users have downloaded these new apps as of March 31, 2014. As a proportion of our total room bookings, bookings on our mobile apps have grown dramatically and accounted for 15.6% of our total bookings in the first quarter of 2014. This further enhanced our ability to personalize interaction with our customers, while also giving customer improved and more convenient access to our reservation services.

We will continue to focus on the changing of -- changing dynamic of customer behavior and social media development to better serve our members, increase operational efficiency, and better -- and attract a large base of members.

We recently announced that we have completed the acquisition of Yunshang Siji Hotel Management Company for a cash purchase price of RMB230 million, subject to customary adjustments. This transaction is consistent with our investment and growth strategy to further penetrate key market in China. This also enhance our value and the geographic diversity of the Home Inns Group portfolio with the addition of a high-quality and differentiated group of hotel in the southwest region of China. Based on our successful experience with Motel 168, we are confident that we will be able to leverage our management and operational capabilities and the integration experience for further driving performance improvements and realize the full value of this transaction.

Now turning now to market outlook for the rest of the year. Looking ahead to the remainder of 2014, we have seen some signs of rebound in market activities recently. However, we are not seeing any robust recovery at this moment. Again, the macro environment is out of our control and beyond what we can actually predict.

What we can do and have done is we have strategically maneuvered our business to be more resilient in the soft market conditions and well-positioned to benefit from any improvement. As China continues to undergo a series of structural and economic changes, we may need to be prepared to operate in an overall business and operational environment that is more subdued compared to the early years of our company's development.

Having said that, we remain positive and enthusiastic about the long-term opportunities in China's travel and lodging industry. As such, we're taking a cautious stand on leased-and-operated hotels unit growth, but are committed to our multi-brand development plan and will maintain a sensible expansion pace that will deliver modest but steady revenue growth, stable unit growth, managed through our franchise and management platform, and to maintain our market leadership.

In conclusion, despite the market softness, our business is healthy and resilient. We have achieved this through our structural transformation to a franchise-focused business, establish capability in acquisition and integration, and effective internal product service and productive development across all brands. We are confident that we have the right strategy in place. We will continue to execute our franchise and multi-brand development plans and will maintain a sensible expansion pace that will deliver stable unit growth to maintain market leadership, sustainable margin expansion and improvements in profitability and long-term value for our shareholders.

With that, let me turn the call over to May, who will walk us through the financials in the first quarter of 2014. May?

May Wu

Thank you, David, and hello to everyone on the call. I will first discuss our first quarter 2014 results, and then provide our guidance for the second quarter of 2014. 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 believe these results better reflect the underlying business performance and results.

On revenue. We delivered revenue growth within the range of our guidance and in line with our expectations. For the first quarter of 2014, total revenue was RMB1.47 billion, increasing 5% year over year. Revenue from leased-and-operated hotels for the first quarter was RMB1.28 billion, a 3.3% increase year over year. Revenue from franchised-and-managed hotels was RMB193.3 million, an increase of 17.8% year over year.

The year-over-year increase in total revenues from both leased-and-operated and franchised-and-managed hotels in the quarter were mainly driven by an increase in the number of hotels and hotel rooms in operation, partially offset by a slightly decrease in RevPAR, as well as an unfavorable comparison for franchised-and-managed hotels in terms of upfront fee revenue. This is due to fewer new franchised-and-managed hotel open in the quarter compared with the same period a year ago.

Total non-GAAP operating costs and expenses for the first quarter were 89.6% of total revenues, compared to 91.5% in the same period a year ago. This decrease in expense ratio was mainly due to continued leverage from cost control savings and increases in efficiency at hotel operational level, as well as reduced preopening expenses due to fewer leased-and-operated hotels being planned for the year given our overall still cautious view.

Now I will talk about the breakdown of the costs. Total adjusted leased-and-operated hotel costs for the quarter were 94.4% of the leased-and-operated hotel revenue, compared to 95.7% in the same period a year ago. This year-over-year decrease in total leased-and-operated hotel cost as a percentage of leased-and-operated hotel revenue was mainly due to lower preopening costs that I mentioned earlier.

Our cost control and productivity gain initiatives at the hotel level have been effectively implemented and will continue. However, the impact of this effort was mitigated by the slight decline in RevPAR in the first quarter of 2014.

Preopening costs included in the leased-and-operated hotel were -- in the leased-and-operated hotel costs were RMB5.9 million for the first quarter of 2014, compared to RMB27.2 million for the same period a year ago.

Adjusted personnel costs of franchised-and-managed hotels were 18% of franchised-and-managed hotel revenues in the first quarter of 2014, compared to 15.9% in the same period a year ago. The increase was mainly due to the lower mix of upfront franchise and management fees included in the franchised-and-managed hotel revenues in the first quarter of 2014 as a result of fewer new franchised-and-management hotel openings compared with the same period a year ago.

We opened 63 franchised-and-managed hotels in the first quarter of 2014, compared with 75 in the same period a year ago. We expect the pace of franchised-and-managed hotel openings to pick up starting from the second quarter of this year.

Adjusted sales and marketing expenses for the quarter were 1.7% of total revenue for the quarter, compared to 1.5% in the same period a year ago. The slight increase was mainly due to spending on certain planned corporate branding initiatives during the quarter.

Adjusted general and administrative expenses for the quarter were 3.5% of total revenue, compared to 3.6% in the same period of 2013. SG&A ratio is not expected to show meaningful reduction this year as we're planning a number of marketing and IT projects to expand our group brand value.

Adjusted income from operations for the quarter was RMB70 million or 4.8% margin rate, compared to RMB39.2 million or 2.8% margin rate for the same period a year ago. Adjusted income from operations increased 80% year over year due to increased revenue and improved margin rate. The year-over-year increase in income from operations margin rate in the first quarter was largely driven by the increased mix shift of higher margin revenue contribution from franchised-and-managed hotel operations and reduced preopening costs due to fewer new leased-and-operated hotel opened and under construction.

Adjusted EBITDA for the first quarter was RMB254.1 million or 17.3% of total revenue, compared to RMB216.1 million or 15.4% of total revenue in the same period of 2013. Adjusted EBITDA increased 17.6% year over year.

Net income attributable to shareholders for the first quarter of 2014 was RMB74.9 million, compared to a net loss of RMB19.4 million in the same period of 2013. Adjusted net income attributable to shareholders was RMB32.1 million for the first quarter of 2014, compared to adjusted net income of RMB10.3 million in the same period of 2013.

Diluted earnings per ADS for the first quarter of 2014 were RMB0.11 or 2 cents in U.S. dollar terms. Adjusted diluted earnings per ADS for the first quarter of 2014 were RMB0.67 or 11 cents in USD.

Now turning to operating cash flow. In the first quarter of 2014, the company generated a net operating cash flow of RMB154.9 million, compared to RMB63 million in the same period of 2013. Capitalized expenditures for the first quarter were RMB103 million, while related cash paid for the capital expenditure during the quarter was RMB173.6 million. The company achieved positive free cash flow for the quarter.

As of March 31, 2014, the company had cash and cash equivalents of RMB1.16 billion. The outstanding balance of convertible notes issued in December 2010 measured at fair market value was RMB1.08b. The outstanding balance of the U.S. dollar denominated three-year term loan due in June of 2016 was RMB719.8 million.

Now turning to our outlook. We maintain our target to open no less than 450 new hotels in 2014. Within this total new hotel opening plan, we expect to open 50 to 70 leased-and-operated hotels and 380 to 400 franchised-and-managed hotels. We consider our recent acquisition of Yunshang Siji part of our overall development and investment program. And hotel additions from this acquisition are included in these numbers.

Total revenues for the Group in the second quarter of 2014 are expected to be in the range of RMB1.69 billion to RMB1.71 billion.

This concludes our prepared remarks, and now would like to open the line for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions] Please be advised that we are accepting one question and one follow-up question from each participant.

Your first question comes from the line of Lin He from Morgan Stanley. Please ask your question.

Lin He – Morgan Stanley

Hello. Good morning David, May and Johnny.

May Wu

Hi, Lin.

Lin He – Morgan Stanley

Hi. Thanks for taking my question. First question is on the recent trends. David mentioned that we have seen some signs of market stabilization, but not meaningful recovery. Can you please provide a bit more color on that? Especially a bit more recently we have seen another social security incident happen in Guangzhou which is a tier 1 city. Have we seen any impact on that?

And secondly, a question on margin. In Q1 we had a nice margin expansion. And then I noticed that David mentioned that we have flat margin from mature hotels despite a RevPAR decline, thanks to the efficiency improvement program carried out. I noticed that the mature hotel RevPAR actually was down something like around 4% for the Home Inn brand. Does that imply that the cost efficiency programs helped the per-hotel cost to decline on a similar level that makes the mature hotel margins flattish?

And also, can you please talk about your outlook on the margin trend? Does the Q1 margin extension make you more positive on the full-year margin trend please? Thank you.

May Wu

Hi, Lin. I will start answering your questions, and David will try seeing if he has anything to add.

First, with regards to recent trends, as we mentioned, the first quarter, we experienced a very tough March with some of the safety incidents. But it's difficult to really pinpoint any particular reason. That was in March.

Now after March, we -- after the March trough, we see -- we experienced some pickup in April and we had a very positive May 1st holiday weekend this year, proving that our initiatives in getting more leisure travelers is successful.

With that being said, our business is still predominantly business travelers. And even with the -- last year we saw a dramatic decrease in four or five-star hotel performance. This year, it seems that the trend in business travel has also spread, to a certain extent, to the economy hotels, especially in the northern regions, as well as in smaller cities. And the reason, we believe, is probably because a lot of the economy in those regions were a result of government stimulus in the past few years, and now it's giving back, while the largest cities and the more established cities, with a more diverse economic base, are being more resilient. So that's what we are seeing overall.

Therefore, as David mentioned, although we are seeing some signs of improvement, we don't think this year will go back to 2011, 2012 kind of level. And so our -- so in the first quarter, our overall RevPAR declined by 2.2%.

And looking into the rest of the year, we think -- we're planning for a slightly down RevPAR in the second quarter, and we will go from there. Hopefully the gradual improvement and stabilization continues. We're planning for perhaps a flat RevPAR in the later part of the year. So that's the current outlook and what we are planning for in terms of our business.

David Sun

Just to give -- apart from that, I think the belief is coming from the current performance in operation. I think it's, in the first quarter, it was down 2.2% in the actual [ph] base and more than 2% of the year-over-year base. But if you look at the second quarter until today, we see the decline is getting narrow and narrow. That we see -- that we believe the market is getting some good signs of the recovery.

May Wu

And with regard to your second quarter, in terms of margin, yes, we are pleased to see that we are able to mostly hold our margins, even with the slight decline in mature hotel RevPAR. Now you correctly pointed out that the Home Inn brand same-store RevPAR decline is somewhat higher compared to the Motel 168 brand given the Motel 168 brand is still experiencing improvement even though we've completed integration.

So overall we would say that we expect that we can hold stable margins overall on our mature hotel segment, with a flat or down to 1% or 2% kind of RevPAR decline. But of course, any RevPAR decline in a larger magnitude will result in margin deterioration. That's inevitable. With that being said, you know, that also proves that if we achieve steady RevPAR, flat RevPAR, or even if the environment improves and we gain positive RevPAR, then we believe that we will substantially benefit from the initiatives that we have already put in place.

Lin He – Morgan Stanley

Got it. May, I just want to clarify. So you were saying you can hold a stable margin of mature business despite flat or slightly down RevPAR. But this is from mature hotel margin only or for the blended margin, including the franchise business contribution?

May Wu

That's for mature hotels.

Lin He – Morgan Stanley

Okay. Okay. So is it fair to assume that with the contribution from the franchised hotels, we are likely to see a positive margin, increase?

May Wu

Yes. And that\s basically what you're seeing in the first quarters. So in the first quarter, the majority of our margin gain is as a result of mixed shift, continued mixed shift to franchised-and-managed hotel sector.

Lin He – Morgan Stanley

Got it, got it. That is very helpful. Thank you.

May Wu

Thank you.

Operator

Your next question comes from the line of Justin Kwok from Goldman Sachs. Please ask your question.

Justin Kwok – Goldman Sachs

Thank you. Just one question on the free cash flow side. I think you mentioned during the call that you achieved a positive free cash flow even for the slow season in the first quarter. Do you mind to give more guidance on what you're expecting for this year in terms of your size of free cash flow? Because you also mentioned that you are doing the revitalization of your existing portfolio, the current opening for the leased-and-operated side is only 60 to 70. So what's your CapEx planning for the full year including the M&A? And for the spare cash then, what's your plan for this year and next year? I just want to get a sense on your cash deployment as you seem to be turning more and more free cash flow positive.

And also just a quick -- short question on, can you update us on, a little bit, on the CFO search? Thanks.

May Wu

Sure. Thank you, Justin. On the free cash flow side, we're planning for a positive free cash flow for the full year. And that will be a combination of our planned positive operating cash flow. As we mentioned, we plan to stick with our 450 units development plan. Of that, majority, a vast majority of that, will be franchise-and-managed. So that will contribute very positively to our operating cash flow and result in a very prudent capital deployment plan.

With regards to leased capital deployment plan, we expect, as we mentioned, we expect 50 to 70 units leased-and-operated hotels. And that already includes a revitalization program of existing hotels, as well as the 239 cash consideration for Yunshang Hotel, which resulted in the addition of 27 leased-and-operated hotels and eight franchised-and-management hotels. So net-net we expect a meaningful free cash flow contribution this year.

And with regards to our cash deployment plan, we continue to see ourselves accumulating some cash for this year and most parts of next year, until we make a final decision on the convertible bond solution next year. And once that decision is made, again, as we also mentioned previously, with the shift of our business model to a more free cash flow generating pattern, we will be considering implementing a regular dividend policy.

Justin Kwok – Goldman Sachs

Okay, thanks. And on the second question, on the CFO search, can you give us any update on that? Thanks.

May Wu

Sure. We are actively recruiting qualified CFO for the company, and so far we are very encouraged by the quality of the candidates that we have seen. And we are confident that we will be able to fill the position in the near future. So stay tuned.

And meanwhile, I think with the depth and breadth of our internal management team in place, we are experiencing a smooth operations in the financial and other aspects of our business.

Justin Kwok – Goldman Sachs

Okay. Thanks, May, and also -- for the answer. Thank you.

May Wu

Thank you.

Operator

Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer

Thank you for taking my questions. First, I want to ask, I understand the business travel demand is still weak, but leisure travel demand has been held up quite healthily. I wonder, strategically or operationally, what do you think you can do to help cater to the leisure travel demand more so that it may help with your business performance?

May Wu

Sure. Thank you for your question. Yes, the leisure travel has been -- the trend has been -- we've seen upward trend in leisure travel actually consistently in the past several years. And we've taken a number of measures to accommodate that demand better, including managing the holiday weekend, marketing and pricing, including again a lot of our social media and IT initiatives are partially targeted to the leisure travelers. And we have already experienced -- we've had good results from our initiative which is actually already reflected in our results.

Although -- one pattern of the -- one characteristic of the leisure travelers is that it's very much concentrated on holiday week and weekends. So it is, even though we are making a lot of efforts to capture this demand, and we are capturing this demand, however, the overall impact is still limited given that the change of national holidays from one very long -- one or two very long holiday to several long weekends starting from a few years ago have already added positive results to our performance.

However, nationwide, there is still very little, you know, the majority of the companies still do not have a personal vacation policy in China, for example. So leisure travel is still very much focused on certain periods. And given that our capacity is limited, we cannot capture this opportunity on an unlimited basis, while outside of this particular timeframe we are still very much driven by business travel, and we are trying to also attract more leisure travelers for other times. But we need to manage a delicate balance because business travel is still a more -- a less price sensitive and a more manageable sector of our business. So we need to manage between these two. But we're doing what we can to capture the leisure demand.

Ella Ji – Oppenheimer

Thank you, May. And then I have another question regarding your mobile booking which now is over 15% of your total booking. What are the channels that mobile is taking from in terms of the shares in the total booking? And also, I wonder, within those customers that book through your mobile apps, are they mostly your existing customers? Are you able to gain new customers from your mobile apps? Thank you.

May Wu

Sure. The mobile booking we are seeing, majority of the customers are conversions from walk-in as well as prior call center customers. But it's really a mix. I think we -- we believe we are attracting new customers from the launching of mobile apps because previously, even with the call center and the online booking, we still have limited reach. But with added mobile capability, as you see, our members have increased 38% year over year, significantly outpacing our hotel unit growth and our revenue growth.

So again, hard to pinpoint exactly why exactly why we are attracting more members, but we think the mobile app launch definitely added to this trend, especially given that we've only implemented this app for less than -- for about six months, and we are already seeing very fast increase in the pickup. The download was significant and the -- if you look at our online booking, or call it CRS booking, a year ago, it was significantly lower, while this year we have substantial pickup. So the numbers are really encouraging. And we believe it's coming from the mobile app users. They're coming from both existing members and new members.

Ella Ji – Oppenheimer

Thank you for the color.

May Wu

Sure. Thank you.

Operator

Your next question comes from the line of Billy Ng from Bank of America. Please ask your question.

Billy Ng – Bank of America Merrill Lynch

Hi, good morning. Thanks for taking my questions. I have two questions. One, first of all, is I just want to get a bit more color, maybe you already mentioned it in the call, is like this time when we see the RevPAR softness, how does that distribute -- what I mean is like, do we see tier 1 city holding up still better just like in the past, Shanghai, tier 1 cities are always performing better, or this time it's more even in terms of the drop of the RevPAR?

May Wu

Sure. Hi, Billy. Yes. I think you're right. This time, the RevPAR softness comes primarily or more driven by the lower-tier cities and the northern part of the country. Again we think this is partially because of the strong trend we saw in the northern part of China in the past few years is more natural resource related, more stimulus related. And for the small, lower-tier cities, also it has a lot of growth needs to be policy driven. And lack of that, we are seeing a more lackluster economy and performance in those regions and cities, while the first-tier cities are, especially Shanghai and the surrounding area, that has -- and the coastal cities with a more diverse economic base, are holding up relatively well.

And Beijing is kind of a mix. The economy base is fairly broad. However, it's often impacted by government policy and security policies and practice. So it's up and down from time to time.

Billy Ng – Bank of America Merrill Lynch

Okay. And I have follow-up question on actually related to the question being asked on the apps, applications, and in terms of like -- well, can you update us what's the latest distribution of your sales channel? Like how many percentage of rooms are selling through direct now through your own website and how many of them are through mobile device, roughly speaking?

May Wu

So, now, roughly 45% comes from our members. And of that, about 25% is through our CRS. Now the CRS include, as we mentioned, both online, call center, and our mobile apps. And we still have about 16% from corporate, and then we have about 12% from third party -- from third party. And then we have -- let's see, walk-in has declined to only about 5%. And yes, that is most of it.

Billy Ng – Bank of America Merrill Lynch

Thank you.

Operator

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

Jamie Zhou – Macquarie

Hi, management. Thank you for taking my questions. I have two questions. First is a follow-up to the management's earlier guidance on flat margins on existing mature hotels. Can I just clarify that flat margin assumption including our reduced preopening expense spending on the new leased-and-operated hotels?

May Wu

No, that does not include the reduction in preopening. This year, we expect reduced preopening cost which will benefit -- ultimately benefit overall margin. But for mature hotels, we believe, even with a flat -- with a flat RevPAR, we will be able to, flat to very slight down, let's say 1% to 2%, we believe we will be able to hold mature hotel margins. But anything more than 1% to 2% RevPAR down mature hotels will experience margin decline.

Jamie Zhou – Macquarie

I see. Thanks. Now in the first quarter we had spent close to RMB6 million on preopening expense. I look at the number of hotel added, that was four leased-and-operated hotels. Can I roughly estimate as over RMB1 million per hotel on the preopening expenses?

May Wu

Yes, that's a fairly okay ballpark number.

Jamie Zhou – Macquarie

Okay. And given that -- you said earlier that 60 to 70 hotel opening targets will be on the leased-and-operated hotel which would include your earlier acquisition of Yunshang Siji, so the remainder of the year we are looking at opening another 20 to 40 hotels, leased hotels?

May Wu

That is correct. But preopening cost on -- however, that, in order to calculate preopening, this year we will offset 25 -- off the leased-and-operated hotels, we will also have six to eight units of Yitel. So that preopening cost will more likely be almost double the -- the Home Inns or Motel preopening. So, on average, it should be between RMB1.3 million or RMB1.39 million preopening per hotel.

Jamie Zhou – Macquarie

Okay, thanks. That's very helpful. My second question is on your new rebranding initiative. We understand that you have an event coming up in Shanghai. And we also see that in the first quarter part of the A&P expense ratio increase was due to the new rebranding initiative. Is there anything you can share with us today on the call, what this rebranding initiative will help us in longer term, or additional, either through A&P or CapEx, that we can expect in the coming quarters? Thank you.

May Wu

Sure. In terms of new branding initiatives, I think after several years of very fast expansion and launching -- and managing a multi-brand portfolio, at the same time, the economy hotel market has also grown more -- one, with more players, and two, become of more sophisticated. Although the market now is dictated by a few leaders, we continue to see new brands coming out, for example, Yunshang, and these trends coming out. And with the increased internet and mobile users, I think customers have also become more sophisticated and become -- now on one hand, they are more familiar with the economy hotel products, which is a good thing; on the other hand, they have also become more discerning in terms of the choice in terms of beyond what was being delivered to satisfy basic lodging needs.

With that in mind, we think that we need to upgrade both in terms of our product and service, but at the same time, is to make sure the people are aware of what we're doing and to communicate effectively what we're doing. So that is the thinking behind our new branding. So it's marketing initiative supported by our enhanced product and service and complemented by our IT platform and initiative. And we believe that in the long term this will help us maintain our market leadership both in terms of scale and product innovation and service quality, and we will in turn transfer it into our pricing gain and RevPAR gain ultimately.

So that's something that we think that we must do to sustain our performance and again for us to benefit when -- for us to be more resilient during bad times and benefit more substantially during good times.

In terms of the investment, we have -- as we mentioned, that's already taking -- on the hotel level, that's already taken into account to our overall CapEx this year, which will continue to -- being planned in about RMB900 million range. And also in our corporate, sales and marketing, and G&A expenses, which as we mentioned we do not expect, even the revenue will continue to grow, we do not expect SG&A ratio gain this year because we are planning on investing in these initiatives. But all the expenses and investment has been accounted for and planned for and we do not expect anything in addition to that.

Jamie Zhou – Macquarie

Great. Thanks. Looking forward to the positive changes. Thank you.

May Wu

Thank you.

Operator

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

Tian Hou – T.H. Capital

Hi, Johnny, May and David. I have a couple of questions. The first question is related to your acquisition of Yunshang Siji. So in your press release you said it's going to close on May 1st. So I wonder, in your guidance, have you included any financials from Yunshang Siji? And also when you acquired the Motel 168, there was a P&L line which is integration cost. So are we going to see another integration cost because of the acquisition of the Yunshang Siji? So that's the question related to this acquisition.

And also for your opening plans for the full year, and I wonder what is the quarterly acquisition supposed to be? Or what's your plan, you know, the planning, either opening plan will be across the year?

The last question would be your mobile app. And the increasing usage of your mobile app definitely is meeting the trend of user habit. And I wonder what the financial impact to your financial performance. So those are my questions.

May Wu

Sure. Okay. Thank you, Tian Hou. Let me through to answer them one by one and try not to forget anything.

In terms of acquisition of Yunshang, we have already closed the acquisition, and Yunshang's performance and financial contribution will be included starting from May 1st or in the second quarter. And that's already included in our guidance for the second quarter as well as the full year.

Now what Yunshang will do for us in terms of directional impact is, as we mentioned earlier, one, we are still taking a fairly cautious view to the overall operating environment. However, at the same time, we are positive about the long-term prospect of China's travel industry and of the economy and midscale hotel segment in general.

Combining those two thinking, what we're doing is continue to grow our portfolio to maintain our leadership and to increase our scale, but at the same time we're doing so predominantly through the franchised-and-managed hotel segment. So Yunshang will be addition to the leased-and-operated part primarily because it has 27 leased and operated hotels and only eight franchised-and-managed hotels. And our acquisition consideration is fairly equivalent to what we would have to -- what we would have to have spent if we were to open those 27 hotels organically.

So that's how we think about the acquisition and acquisition investment. So I hope that answers your question with regard to Yunshang.

With regards to the integration, yes, we will incur some integration costs starting from the second quarter. However, in terms of magnitude, it will not be comparable to Motel 168 even on a per-hotel basis, because Yunshang is fairly -- is a hotel -- it's a small group of hotels with fairly healthy operations. So we, depending on the final figure, we may or may not break it out in the second quarter or full year.

So the short answer is there will be some integration cost but it's de minimis, it's very minor, and I don’t think for modeling purpose much consideration needs to be given.

And then, this also relates to our opening plan, we continue to commit to our 450 units or at least 450 new hotel addition opening plan, but that will be more geared towards franchised hotels which will fall in the range of 380 to 400 units, while leased and operated hotels is expected to be 50 to 70. And in the first quarter and second quarter, we've been focusing on the Yunshang project. So more of the leased-and-operated -- remainder of the leased-and-operated hotel opening will be later in the year. So that's with regards to the opening plan.

And in terms of future acquisition, we do not have anything imminent in the pipeline right now. Our overall plan and strategy is that we will consider small acquisitions similar of the scale -- in scale to Yunshang, as part of our regular development plan. Because what we're seeing now in the marketplace is, just as we've seen before, there are small chains that reach 20, 30 scale, then it feels the pressure of further expand, and who are willing to sell.

However, it's not easy to identify high-quality, you know, small groups like that, given various issues, from lease compliance, to labor complying, to the type of product and design. So it's -- although we think we are very lucky to have identified and eventually have been able to sign and close the Yunshang acquisition, but we do not rule out such future acquisitions, but there is nothing imminent right now.

Lastly, on the mobile app, we have, you know, at this time, we see the financial impact is really minimum because I think it's in its early stage.

David Sun

Yes. On top of that, I say, if any future acquisition we did is including the development plan. We are not -- put on any more expansion on top of the capital spending we plan for.

Tian Hou – T.H. Capital

Okay. So -- okay, that's very helpful. I just have one more question.

So, budget hotel, chain budget hotel. One of the purpose of a chain budget hotel is to let people know your name and feel safe and to be -- to go to your hotel. Now the company -- several companies change their strategy from one name to multiple name, and then strategy is multiple brands. That defeats the initial purpose.

May Wu

Okay. I think, in terms of brands, you know, Home Inns has grown to an over 2,000-hotel chain. And with, you know, consumers' need for choices, we are -- the Home Inns core brand itself is already one of the largest brands in the world in terms of number of hotels and number of rooms. And I think in order to grow a business and to grow our company, eventually, one needs to grow our brand portfolio. But that does not mean those portfolios of brands are being run independently or are being recognized by consumers as totally unrelated brands.

That's why -- exactly why we are re-launching the corporate and hotel brand portfolio branding initiative. What we would like to do and what we think we can is to have a collection of brands under the Home Inns umbrella. Home Inns umbrella is to instill the perception of value and trust and quality, while different brands also communicate different products and positioning and different characters. This is not unlike any larger hotel chains such as Starwood, Marriot, Intercontinental, Accor. All of them have a collection of brands.

Tian Hou – T.H. Capital

Okay. Thanks for answering my questions.

David Sun

I think you asked a very good question. I think that's the brand initiative, we are planning to review that, is we call the brand family. So as the growing of the Home Inns, now we have one, two, three, four brands, so what is the position for each of the brands? What's the relationship between the product brand and also the whole Home Inn brand? So I think this is the initiative, we are starting to do that.

Tian Hou – T.H. Capital

Okay, that's very helpful. Thank you.

David Sun

Thank you.

May Wu

Sure.

Operator

There are no further questions at this time, I would now like to hand the conference back to today's presenters. Please continue.

May Wu

Thank you very much for everyone's participation today, and I know I will be speaking with some of your later on. And we look forward to your continued attention to Home Inns, and see you next quarter.

David Sun

Thank you.

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Home Inns & Hotels Management (HMIN): Q1 EPS of $0.11 beats by $0.03. Revenue of RMB1.47B (+5.0% Y/Y) beats by RMB60M.