Home Inns & Hotels Management's (HMIN) CEO David Sun on Q2 2014 Results - Earnings Call Transcript

Aug.13.14 | About: Home Inns (HMIN)

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

Q2 2014 Earnings Conference Call

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

Executives

Ethan Ruan – IR Manager

David Sun – CEO

May Wu – Chief Strategy Officer and Interim CFO

Analysts

Justin Kwok – Goldman Sachs

Tian Hou – T.H. Capital

Jamie Zhou – Macquarie

Lin He – Morgan Stanley

Operator

Ladies and gentlemen, thank you for standing for Home Inns Group's Second Quarter 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, Ethan Ruan, Home Inns Group's Investor Relations Manager.

Ethan Ruan

Hello everyone, and welcome to our earnings conference call. Our second quarter 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, David Sun.

David Sun

Thank you, Ethan. Hello everyone, and thank you for joining us today to discuss our second quarter results.

We are pleased that our revenue for the second quarter matched our expectations. It is also very encouraging that we achieved the sixth consecutive quarter of year-over-year margin improvement, driven by the solid execution of our franchise focusing -- focus and multi-brand development strategy, as well as our commitment to effective cost-control initiatives, and driving improvements in overall productivity.

To sum up, some highlights for the quarter. We continued our main focus on franchise expansion strategy in the second quarter and our pipeline for franchised and managed hotels remained strong for all of our brands, illustrating substantial strong interest from our existing and new franchise partners.

Our franchise focus growth strategy has also allowed us to benefit from low pre-opening hotel costs. And this, along with other cost-control efforts, is protecting our margin and productivity. Our core mature hotels remained relatively stable performance, and we are encouraged by the recovering occupancy rate at the hotel, despite the challenges in the macro environment.

Our successful execution of our Motel 168 development plan lead to positive contribution to our overall group performance. In addition, Yitel performance very well this quarter, and we are pleased to see increasing demand from our franchise partners for our Yitel brand.

Our recently completed Yunshang Siji acquisition give us a portfolio of differentiated hotels in the southwest part of China. Post acquisition, we are focused on leveraging our previous success integrating Motel 168 to drive operational and performance improvements at this new addition to our portfolio.

As part of our multi-brand strategy, we recently rolled out certain updated corporate branding initiatives, which we believe will form the foundation for further brand positioning and help us attract new and diversified customers.

This has all worked together to keep us on track with our plan for the year. In addition, our cash flow remained strong and we ended the quarter with RMB365.8 million operating cash flow.

Taking a closer look at our group operational results, group occupancy rate was 86.7% in the second quarter, a slight decrease from 87% in the same period a year ago. This is mainly due to the dilutive impact from the newly-opened hotels and a relatively soft macroeconomic conditions this quarter.

ADR declined slightly year over year to RMB164, from RMB167 a year ago, mainly attributed to the promotion for bookings through our mobile app and WeChat, resulting in a slightly year-over-year decrease in RevPAR to RMB142 from RMB145 in the same period a year ago.

As of June 30, 2014, there were 1,732 hotels in operation for at least 18 months. These mature hotels' ADR declined year over year slightly, from RMB168 to RMB166, mainly due to the promotion on mobile apps and WeChat booking, resulting in a slightly decrease in RevPAR. It is good to see that occupancy rate holds steady at 88.9%. We are encouraged by the narrowing gap and the stabilizing occupancy rate.

Our focus on product refinements, custom service and staff productivity at all of our hotels and across all of our brands continued during the quarter. Our hotels -- our hotel cost utilization improvement program has resulted in a relatively stable operating margin at mature hotels. Importantly, we are encouraged by the high level of customer satisfaction received at our mature hotels, and we remain committed to achieving further operational and performance improvement.

We continued to commit to our transformation into a predominantly franchised and managed hotels business. And this has been a key strategic driver of our growth and success in the last few quarters. As of the end of the second quarter, franchised and managed hotels represented 62.2% of our total hotels in operation, up from 57.3% in the same period last year and 60.9% at the end of the first quarter. Also, our development pipeline for franchised and managed hotels remained very strong, and we are well on track and are confident of achieving our overall target for new hotel opening this year.

We continued to see strong interest and demand from existing and new franchise partners across all four of our brands. And we are very encouraged by the increasing demand from our franchise partners for our Yitel hotels. This demonstrates our increasing brand value and the success of our franchise strategy among our new and existing franchise partners, who trust our ability to execute and support infrastructure for our franchised and managed hotels. We will remain focused on franchised and managed hotels business, and we are confident that we will continue to achieve margin expansion and strong profitability from this growth strategy.

Regarding to our frequent guest membership program, we recorded a solid increase in membership in the quarter, as we benefit from our enhanced brand value and scale. At the end of the quarter, our frequent guest program reached a record high of 19.7 million unique active non-corporate member, an increase of 37.8%, compared with 14.3 million at end of second quarter last year.

I would also like to give you an update on program -- on progress in efforts to build out social media and mobile app presence. Since we launched our mobile apps in October 2013, about 1.4 million user have download these apps -- new apps, as of June 30, 2014. As the proportion of our total room bookings, bookings on our mobile apps have grown dramatically and accounted for 21% of total bookings in the second quarter.

Our efforts to grow our mobile and social media platform are driven by the increasing customer demand, tends to be more personalized and customer centric. We aim to leverage our digital ecosystem and various mobile and social media tools to better understanding our customers' behavior and need to -- and needs, and to provide a high level of service, with the ultimate goal of increasing our customer satisfaction and retention rate.

In addition, this is a key initiative as part of our recent marketing and corporate branding activities. As we move away from a traditional hotel operating business and towards our vision of establishing a leading international brand, we have increased and will continue our efforts on digital connectivity with our customers.

Now, turning to the outlook for remainder of the year, we are seeing some signs of market stabilization. However, we are still just cautiously optimistic on the overall travel and lodging industry in China, as we have not seen a full market recovery. Even so, with our main focus remain on our multi-brand and franchise focus strategy, we are confident that we will achieve our full-year target for new hotel openings.

In conclusion, our business has achieved consistently stable performance and it's also continuing to scale in the right direction, towards a predominantly franchise focused and multi-brand business model. In the first half of the year, we have proven that our multi-brand and franchise-focused growth strategy is working well. And together with our solid execution capabilities and underlying operational strengths, it has helped us to successfully navigate soft market conditions and achieve stable and strong performance.

Going forward, along with our effective product, customer services and productivity measures we have implemented across all of our brands, we believe we are well-positioned to take advantage of any market recovery opportunities in China's travel and lodging industry, further establish our market leadership position, and deliver long-term value to our shareholders.

Before I turn the call to May for a financial overview, I want to give you an important update on our CFO search. Home Inns Group has appointed Ms. Cathy Li as the Company's Chief Financial Officer with an effective start date of August 25, 2014. Cathy will bring the Company a wealth of experience and expertise in the corporate finance, accounting, business management and strategic development. We are very excited to welcome Cathy to Home Inns Group family.

On behalf of company and the Board, I also want to express our appreciation for May's contribution as interim CFO in the past several months. May will cease to serve as interim CFO, up until effectiveness of Cathy's appointment, and will remain in her current role as the Company's Chief Strategy Officer.

With that, let me turn the call over to May, who will walk us through the financials to second quarter in more detail. May?

May Wu

Thank you, David, and hello to everyone on the call. I will first discuss our second quarter results, and then provide you our guidance for the third quarter of the year. 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.

Revenue. On revenue, we delivered revenue growth in line with our expectations. For the second quarter, total revenue was RMB1.7 billion, increasing 6% year over year. Revenue from leased and operated hotels for the second quarter was RMB1.46 billion, a 3.3% increase year over year. And revenue for franchised and managed hotels was RMB239.1 million, an increase of 26.3% year over year.

The year-over-year increase in total revenues, from both leased and operated, and franchised and managed hotels, in the second quarter were mainly driven by an increase in the number of hotels and hotel rooms in operation, partially offset by a decrease in RevPAR.

Operating costs and expenses. Total non-GAAP operating costs and expenses for the second quarter were 80.2% of total revenue, compared to 80.9% in the same quarter a year ago. I will talk about the breakdown of the costs.

Total adjusted leased and operated hotel costs for the quarter were 83.1% of the leased and operated hotel revenue, compared to 83.5% in the same period a year ago. This year-over-year decrease in total leased and operated hotel costs as a percentage of leased and operated hotel revenue was mainly due to lower pre-opening costs in the second quarter, that I mentioned earlier. Now pre-opening costs included in the leased and operated hotel costs were RMB6.8 million for the second quarter of 2014, compared to RMB19.1 million for the same period a year ago.

Adjusted personnel costs of franchised and managed hotels were 22.6% of franchised and managed hotel revenues in the second quarter, compared to 21% in the same period a year ago. The increase was mainly due to the lower mix of up-front franchise and management fees included in the franchised and managed hotel revenue in the second quarter. And to a lesser extent, it was due to the modest RevPAR decline, resulting in lower revenue per available room in the second quarter, compared with the same period a year ago.

We opened 123 franchised and managed hotel in the second quarter, compared with 83 in the same period a year ago.

Adjusted sales and marketing expenses for the quarter were 1.8% of total revenues for the quarter, compared to 1.1% the same period a year ago. The increase was due to [indiscernible] on certain planned corporate branding initiatives during the quarter.

Adjusted general and administrative expenses for the quarter were 3.7% of total revenue, compared to also 3.7% in the same period of 2013. We expect SG&A ratio for the year to stay relatively stable, as we're planning a -- as last year, as we plan a number of marketing and IT projects expand our group brand value.

Adjusted income from operations for the quarter was RMB236.4 million, or 13.9% margin rate, compared to RMB208.2 million, or 13% margin rate, for the same period a year ago. The year-over-year increase in margin was mainly driven by the increase of mix of higher margin revenue contribution from franchised and managed hotels operations, as well as reduced pre-opening cost, due to fewer leased and operated hotel being planned for the year.

Adjusted EBITDA for the second quarter were RMB440.7 million, or 25.9% of total revenue, compared to RMB393.6 million, or 24.6% of total revenue in the same period of last year. Adjusted EBITDA increased 12% year over year.

Net income attributable to shareholders for the second quarter were RMB108.2 million, compared to net income of RMB94.8 million in the same period of 2013. Adjusted net income attributable to shareholders was RMB168.4 million for the second quarter of this year, compared to adjusted net income of RMB139.7 million the same period of last year.

Diluted earnings per ADS for the second quarter were RMB2.27 or $0.37 in US dollar. Adjusted diluted earnings per ADS for the second quarter were RMB3.38 or $0.55 in US dollar.

Now turning to operating cash flow. In the second quarter, the Company generated a net operating cash flow of RMB365.8 million, compared to RMB388.8 million in the same period of 2013. The decrease in net operating cash flow year over year was mainly due to decreasing accounts payable during the second quarter. Capitalized expenditure for the second quarter were RMB194.6 million, while related cash paid for capital expenditure during the quarter was RMB85.1 million.

As of June 30, 2014, the Company had cash and cash equivalent of RMB1.34 billion. The outstanding balance of convertible notes issued in December of 2010, measured at fair market value, was RMB1.12 billion.

The outstanding balance of the US dollar denominated three-year term loan due in June of 2016 was RMB719.9 million, and the outstanding balance of the short-term loan assumed from the Yunshang Siji acquisition was RMB73 million.

Now turning to our outlook, we remain -- we maintain our target of opening no fewer than 450 new hotels in 2014, including approximately 50 new leased and operated hotels. The balance is expected to consist of no fewer than 400 new franchised and managed hotels, highlighting continued strong franchise demand that is contributing a positive return to the business.

As mentioned last quarter, we consider our recent acquisition of Yunshang Siji part of our overall development and investment program. And the hotel additions from this acquisition has already been included in these numbers.

Total revenue for the Group in the third quarter of 2014 are expected to be in the range of RMB1.875 billion to RMB1.895 billion.

This concludes our prepared remarks. And now let's open the line for your questions. Operator?

Question-and-Answer Session

Operator

[Operator Instructions]

May Wu

Operator, we're ready for questions.

Operator

Thank you. Your first question comes from the line of Justin Kwok of Goldman Sachs. Please ask your question.

Justin Kwok – Goldman Sachs

Hi, good morning. Thanks for taking my question. Maybe I have two question. The first one is about the brand and the other one is about cooperation. The first question, about the brand development. I guess one of your competitors already now have seven different brands in their portfolio. And when I look at your press release, now you have a separate disclosure for Home Inn Motel, Siji and also Yitel. So do you mind to walk us through in your plans how many brands you're going to see? And in particular, how are you going to develop the Yitel brand? What's the size you're expecting in the next one or two years? And also, are you keeping the Siji brand at the moment? This is the first question.

May Wu

Hello everyone on the line. Please bear with us a few moments. It seems that we're experiencing some technical difficulty with the conference center. We're trying to connect you. The operator is working there to try and to connect you with us. Thank you for your patience.

Operator

Ladies and gentlemen, your lines will be placed on music hold while we attempt to rectify the situation. One moment please.

Ladies and gentlemen, thank you for your patience. We will now resume the question-and-answer session. [Operator Instructions]

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

Tian Hou – T.H. Capital

Good morning, management. I have a couple of questions. One is related to your multi-brand branding strategy. And you know, I think in order to really benefit from the economy of scale, and I think that is [Technical Difficulty] but now you have a multiple brand and each brand seems like, you know, relatively smaller scale. So, how do you enjoy the economy of scales? That is the number one question.

Number two will be, you know, as you develop your leased and operated hotel, I think it seems sort of become harder and harder as the property costs become higher and higher. So what's your strategy going forward? Are you going to develop leased and operated hotels through acquisitions or is there any other way? That's my two question. Thank you.

May Wu

Thank you, Tian Hou. Let me answer your questions one by one. In terms of our multi-brand strategy, it is the result of our realizing that today's audience, our target customers, has evolved into a more sophisticated group of travelers who has more individual preferences in terms of product positioning and value proposition, as well as in response to the increased discretionary income level of the Chinese consumer.

So first of all, we rolled out the mid to high-scale Yitel brand a few years ago. Today we've reached approximately 20 units, and we expect to have approximately 40 units by the end of this year. And we expect that number to perhaps double next year. So, Yitel, in the beginning, it always takes some time for a brand to develop and to ramp up, but we believe that we have reached a stage for Yitel whereas we are prepared and ready for a faster rollout.

And with regards to other economy hotel brands, with our large portfolio, and that's because we have a very large base, so relatively speaking, both Home Inns as well as Motel 168 brand are substantial in size. We also share the operational support and management resource for both economy brands. In that sense -- as well as a member platform -- in that sense, the scale is limited not by the brands but by portfolio as a whole.

And for Yunshang Siji -- yes. And for Yunshang Siji, that is a small brand with only 30-plus hotels in the portfolio, including a few that's still under development. But this is an acquisition whereas we see the value of this portfolio and its proposition in the local market. At this time we have not decided if we will expand the brand or not. But again as we mentioned, the hotels are operating well on their own and they're part of our economy hotels portfolio whereas we share all the management resource.

In terms of your second question, with regards to leased and operated hotel development, we have -- I think you're totally correct in saying that the lease -- the property market has become less and less in our favor compared to the earlier years. As a result, there will be more and more -- it will be more and more difficult to find extraordinary returns on the leasing front. And hence, our strategy to really get ourselves more towards a franchised and managed hotel operator whereas our value added is to manage the brand and to manage the hotel day-to-day operations to sustain a superior performance of our branded hotels as compared to non-branded hotels in the industry.

And as you see, this is also respected in our current operations as well as our guidance for new hotel openings. This will continue to allow us to expand our network and realize profit in our hotel branding and management capacity rather than from the leasing capacity.

Tian Hou – T.H. Capital

That's very helpful. Thank you.

May Wu

Thank you.

Operator

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

Jamie Zhou – Macquarie

Hi. Thank you, management, for taking my question. My first question is a follow-up on the brand -- multi-brand strategy. Can you give us an update on your newly-launched hotel brand? I understand that there's some developments going on on the positioning of the premium economy brand. Can you give us an update please?

May Wu

Hi, Jamie. Thank you for your question. I believe you're referring to our Home Inns Plus brand that we are currently -- that we discussed during our branding event in May of this year that we're currently developing. We'll have the first Home Inns Plus coming to operation in September of this year. And based on the success of this first hotel, we will control the pace of the new launch, but we are committed to move forward with this new product. We believe that this is a -- well, to tell everyone a little bit about this new product, Home Inns Plus, of course, this is still the tentative name at this time, Home Inns Plus targets to fill in the gap between the core Home Inns and Motel 168 brand and the Yitel brand. Current Yitel's pricing target is 60% to 80% premium compared to the economy hotel brand, while the Home Inns Plus brand will target approximately a 30% price premium.

And the initial stages of rollout will include both leased and operated hotels and franchised and managed hotels. It will also include both new property conversions as well as some existing Home Inns hotel conversions. At this time we do not have a specific number in mind yet, but again the first launch will be in September of this year and we expect multiple properties by the end of this year.

Jamie Zhou – Macquarie

Okay, thank you. That's helpful.

Second question is on the franchised gross margin. I noticed there's a decline this year and it was cited the reason as the lower mix of upfront franchise and management fees. Can I clarify whether that's because the lower -- the higher base of number of franchised hotels, therefore, the lower percentage of total franchise revenue coming from these new upfront franchised hotel openings or has there been a decline in the percentage of franchised -- initial franchise fees because of renewal and other issues? Can you clarify on what's the reason for the margin decline there?

May Wu

Sure. Actually, in general, the upfront fee declined about 1% -- 1% to 1.5% this year versus last year as a total percentage of franchise revenue. And that is caused by yes, number -- the main driver of that is the larger base that we have. And to a lesser extent, it's because of the number of rooms per new franchised hotel, as -- in some -- especially in some of the smaller cities, the properties are smaller, and we charge franchise upfront fee by scale per-- on a per room basis with some limitation. So that's one.

And I also want to add to your question in terms of the reason for the margin decline which is, as we mentioned on the call, to a certain extent, it was also caused by the RevPAR decline per hotel, and therefore the fixed cost as a percentage of revenue has decline somewhat.

David Sun

Yes, I think, on top of that, is that we did grant some incentive or reward program for the multi-franchisee to have what we call the promotion, the incentive of the upfront fee. So that's -- now the multi-brand -- multi-franchisee getting increasing more and more, that would be some way of the impact of the upfront fee.

Jamie Zhou – Macquarie

I see. Thank you very much.

May Wu

Thank you.

Operator

Thank you. Your next question comes from the line of Lin He of Morgan Stanley. Please ask your question.

Lin He – Morgan Stanley

Good morning, management. Thanks for taking the question. Two questions from me. One is, can you talk about what are the clear positive outcomes that you have seen after you rolled out this corporate branding initiative?

And the second thing is, we have seen that the OTA channel, the third-party channel, now accounts for around 10% of the room night bookings, slightly higher than the level in the past. Does this concern you? And what do you think the trend will be going forward? Thank you.

May Wu

Hi, Lin. Thank you for your questions. With regard to the multi-brand initiative, as you're aware, we rolled out this initiative first in May of this year. It's only been a few months. I think we're encouraged by the -- we are encouraged by some of the early customer feedback on our website and through the communication from our mobile apps. But I think it's still too early to quantify any of the results.

In the future, we expect the multi-brand marketing initiative to be more of a support to actual product launch. I think the eventual result will need to come from the Yitel performance, will need to come from the Home Inns Plus products that we are launching later this year, and I think it certainly helped us to sustain our performance at our existing Home Inns hotels as we continue to have the right mind share in our customer's mind. So that's your first question.

David Sun

Yes. For the second one, for the percentage of OTA, I think we always maintained the percentage around 6% to 10%. So in the trend, we still believe we will very -- organize ourselves to be the range of the -- kind of 10% of the range.

May Wu

I think I want to add on that. We believe 10% is still a very reasonable rate, and this is a little higher compared to a year ago but similar to the prior quarter. One driver is also because of the number of OTAs in the market place the marketplace, even though the leaders in OTA space is still fairly obvious, there's constantly new OTAs emerging in the space, and we want to maintain at least some relationship, sometimes could be experimental relationships with these suppliers.

Lin He – Morgan Stanley

Okay, got it. Thanks very much.

May Wu

Thank you.

Operator

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

Justin Kwok – Goldman Sachs

Hi, morning. Thanks for taking my question again.

Maybe just two questions. I think someone asked earlier on, but one is on the RevPAR side and the other is on cooperation side. So in your revenue guidance, on your forecast for the second half of the year, what are you assuming in terms of your same-hotel RevPAR growth? Are you keeping the trend you've seen in the second quarter, are you seeing some sequential improvement in a way?

And also regarding the room rate, I think David mentioned earlier on that some of the room rate decline was probably affected by the promotion related to the mobile app. So, should we see the thing to go smaller in the second half as your mobile ramp up or is it something that should still be hindering the room rate in the near term? This is the first question.

May Wu

Sure. Let me answer this question first. For the RevPAR trends for the rest of the year, as we're seeing continued market stabilization, however, no significant uptick, we expect that negative RevPAR gap year over year will continue to narrow, and hopefully we will reach a flattish type of RevPAR year over year for mature hotels in the third quarter and a slight uptick in the fourth quarter. So that's what we are planning for.

In terms of the RevPAR mix from occupancy versus ADR, yes, you're correct that this quarter, ADR overall declined RMB2 versus a year ago, mostly from the app booking whereas we have a [indiscernible] promotion. We've maintained list price stable year over year. We actually continued to roll out our app initiative. We do expect this trend to somewhat continue. But net-net, we still expect a flattish kind of Q3 RevPAR for mature hotels, and hopefully a slight uptick in Q4.

Justin Kwok – Goldman Sachs

Thanks. That's very helpful color. And I guess the second thing is more from a strategic point of view, is we are seeing more and more Chinese companies having cooperation with international players including some OTAs that we have seen. It's something also on your plan from a strategic point of view or are you seeing, for example, yourself developing more in Taiwan or other places, or is it something that we should be focusing more in the near term, or do you think that it's still very early stage that that is not going to be anything meaningful? Thanks.

May Wu

Sure. The short answer is it's still going to be very early stage and we do not expect anything meaningful. Let me elaborate on that.

First, with regards to the OTA front, we are also in cooperation with some international players such as Agoda and also eLong and -- both eLong and Ctrip, they also have, you know, eLong is directly connected with Expedia, and Ctrip also has its multi-language portal and some international users. So from that end, we are connected. But I think because of our product limitation, currently, majority, vast majority of our customers are still domestic oriented.

With regards to other aspects of the international expansion, that's something we've talked about and we continue to explore. Our marketing alliance with the group of hotels in Taiwan is the first step. And Taiwan makes sense to us because it's a Chinese-speaking region and its customers are already using Home Inns hotels when they travel to China.

We, while exploring our expansion in other regions, one challenge is that we still have limited brand awareness in these regions, and entering these regions will represent a significant investment for the company. And it's about a decision again where to allocate our resource and the timing of allocating these resource. While that -- overseas expansion continues to be something in the back of our mind, we still have plenty to do in the domestic market at this time.

David Sun

Yes, Justin, back to your question. I think the core strategy we have today is we are still on the early stage to looking for the oversea expansion, but majority, our focus is still on the domestic.

In the future, we're still focusing on the -- the strategy, we're still focusing on the franchised and managed hotel expansion for the economy motels, and then we are very focusing on the Yitel expansion starting from this year and next year, and also we will roll out for the new Home Inns Plus expansion strategy in domestic China.

Justin Kwok – Goldman Sachs

Thanks. Very clear. Thank you.

May Wu

Thank you.

Operator

Thank you. Your next question comes from the line of Marilyn Moh [ph] of Indas Capital [ph]. Please ask your question.

May Wu

Good morning.

Operator

Marilyn Moh of Indas Capital [ph], please ask your question.

Unverified Participant

Hi, good morning. Sorry. I have two questions. One is regarding the upfront licensing fee, because it is significant part of our revenue, what's our renewal strategy for licensees that renew their franchise?

May Wu

Our franchise agreement has a duration of eight years, and typically the upfront fee is mostly to cover our internal corporate activities such as project evaluation, design support, so on and so forth. So these activities are relatively minimum at the time of renewal. And so at current time we're not charging a renewal fee when a franchise decides to renew after the initial eight-year term.

And relatively speaking, it is a fairly small percentage of our overall franchised and management fee, representing -- the percentage is only about 10% of our franchised and management fee revenue.

Unverified Participant

Okay, thanks. And the second question is about ADR, because you mentioned about the ADR decline in the second quarter is impacted by the WeChat and the app promotions. I wonder what the ADR would have been if there is no such promotion?

May Wu

Sure. Our overall ADR declined by RMB2 from RMB168 a year ago to RMB166. And our promotion is to offer RMB5 discount if the booking is done through our mobile app or WeChat. Now, our mobile app booking for the last quarter represent a 21% of our total booking. So net-net, it's -- we would say the majority of the impact of the ADR received -- came from the mobile -- from the new mobile app -- from the mobile app booking. But to a very small extent, there could also be customer channel mix changes and so forth.

Unverified Participant

Can I just multiple the RMB5 discount and then 21%? Is that -- around RMB1 impact on the ADR?

May Wu

Yes, you can. That would be a reasonable estimate.

Unverified Participant

Okay. And you mentioned about the third quarter and fourth quarter actually you expect flattish or up RevPAR despite of the promotions. So do you expect actually the overall situation will gradually become better or do you need to offset the promotions?

May Wu

Well, while we continue to expect some negative pricing impact from the mobile apps and WeChat promotion, we do see stabilization in the marketplace and although not a dramatic recovery. So we are -- our goal is to achieve a flattish RevPAR in the third quarter and the most probable mix will be a slight ADR decline and a slight occupancy uptick.

However, those two tend to go hand in hand. If occupancy rates recovers nicely in some of our hotels in some regions, then we may again, adjust customer channel mix or increase price slightly. It is very difficult to accurately predict within a 1 or 2 percentage where the RevPAR contribution will come from.

Unverified Participant

Okay, good. Thank you.

May Wu

Sure.

Operator

[Operator Instructions]

May Wu

Okay, operator. We at Home Inns, thank you for everyone's interest in participating in today's --- our earnings call. We look forward to speaking with you in the next quarter. Thank you.

David Sun

Thank you.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating.

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