Home Inns & Hotels Management CEO Discusses Q4 2010 Results - Earnings Call Transcript

Mar. 8.11 | About: Home Inns (HMIN)

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

Q4 2010 Earnings Call

March 7, 2010 8:00 PM ET

Executives

Ethan Ruan – IR

David Sun – CEO

Huiping Yan – CFO

May Wu – Chief Strategy Officer

Analysts

Chris Woronka – Deutsche Bank

Allen Gee – Oppenheimer

Billy Ng – Bank of America

Adam Krejcik – ROTH Capital Partners

Justin Kwok – Goldman Sachs

Fawne Jiang – Brean Murray

Lin He – Morgan Stanley Asia Limited

Noah Hudson – Guotai Junan

Operator

Hello and thank you for standing by for Home Inns 2010 fourth quarter and full-year earnings conference call. At this time all participants are in a listen-only mode. (Operator Instructions) I would now like to turn the call over to your host for today’s conference, Ethan Ruan, with Home Inns Investor Relations Manager. Please proceed sir.

Ethan Ruan

Hello everyone, and welcome to our earnings conference call. Our fourth quarter and full-year earnings results were released earlier and are available on the company’s website. With us today is David Sun, our Chief Executive Officer; Huiping Yan, our Chief Financial Officer, and May Wu, our Chief Strategy Officer and Chief Executive Officer for Yitel brands, who will be further discussing our performance. After prepared remarks, David, Huiping and May will be available to answer your questions.

Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties and such our results may be materially different from the views expressed as of today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. Home Inns does not undertake any obligation to update any forward-looking statements except as required under applicable laws.

As a reminder, this conference is being recorded. In addition, a webcast of this conference call will be available on Home Inns Investor Relations website at english.homeinns.com.

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

David Sun

Hello, everyone. And thank you for joining us today as we discuss our results from the fourth quarter and full-year 2010 operations and financials. I’m very pleased to announce another strong quarter with which we concluded a highly successful year. Looking back to 2010, we started the year with strong business momentum as a result of Chinese economy recover from the slowdown that had started in later 2008.

Given our mature hotels strong and a stable performance and the limited new hotels opening in the first half, we seized opportunities and between March and June, we successfully implemented 3% to 5% price increases throughout majority of our mature hotels. This allowed us to recover price decrease during the economy downturn as well as keep our overall price level close to be on par with inflation throughout the year. The highly acclaimed Shanghai World Expo was transformative for entire Chinese travel industry.

It brought better than estimated impact to about 65 of our Shanghai based hotels. Meanwhile supported by an overall stable Chinese economy environment and healthy growth of domestic travel industry, our entire portfolios delivered improvements in key performance metrics year-over-year in the fourth quarter, as well as on the full-year basis. Home Inns’ fourth quarter revenues increased 14.2% year-over-year to RMB797.9 million. And total revenues for the year increased 21.8% year-over-year to RMB3.17 billion. Both results are within our guidance range.

Overall ADR – overall average daily rates increased to RMB173 million in the fourth quarter, an increase to RMB175 million for the full-year of 2010. Combined with an occupancy rate of 90.4% in the fourth quarter, and 93.5% for the full-year. Our RevPAR increased 5% year-over-year in the fourth quarter to RMB156 million and has increased 12% year-over-year to RMB164 million for the full-year.

There were 535 hotels that had been in operations for at least 18 months in the fourth quarter of 2010. Their RevPAR for 2010 increased from RMB153 million in 2009 to RMB163 million. There has been a consistent favorable like-for-like comparison in such performance improvements for the past five consecutive quarters. Our mature hotels as a group, continued to provide positive contributions to the entire portfolio. With the strong operating performance Home Inns’ reported adjusted net income of RMB102 million for the fourth quarter, which was an increase of 34% year-over-year, and RMB466 million for the full-year, which more than doubled the adjusted net income of RMB290 million for 2009.

As of December 31, 2010 Home Inns’ had a 3.8 million active non-corporate members, representing a 51% increase from 2.52 million as December 31, 2009. Room nights sold to active non-corporate members consistently represent over 50% of total room nights, and a stable revenue base. On the development front, we delivered our commitment and opened a total of 208 new hotels in 2010. By the end of the year, we had a total of 818 hotels opened in across 146 cities in China.

In addition as of December 31, 2010 we had 21 leased-and-operated hotels and a 69 franchised-and-managed hotels contracted and under constructions. It is worth noting that our franchise program has reached a level of maturity with a balanced approach in gross leased-and-operated hotels and franchised-and-managed business. Franchised-and-managed hotels represent close to 60% of total new hotels opening in 2010. At the end of 2010, 45% of our total number of hotels is franchised-and-managed, up from 37 a year ago.

Franchise business will play increasing important role in our overall strategy and a business operation on going forward. Home Inns’ received the International Franchiser of the Year Award by the International Franchise Association. This came as a result of our consistent commitment to our franchisers, sufficed which augment [ph] enhanced Home Inns’ brand value. I’d like to take opportunities to further comment on our new hotels development, as anticipated with our conservative planning to development during 2010 during economic slowdown, most of our 2010 new leased-and-operated hotels opened in the second half of the year and the majority in the fourth quarter.

Revenue contribution from the new hotels led behind operating costs most of which are fixed, such as rent and personnel. We expect near-term margin pressure from the new hotels before they are fully ramp-up. In addition, high pre-opening cost associated with more leased-and-operated hotels under conversion, we also went on the margin.

With this said however Home Inns’ long-term growth prospect beyond 2011 are very encouraging as we resume more traditional development pattern in 2011 and a focus on operational excellence. Our view is that the Chinese economy hotels market is still on early stage of development and its growth in the next few years will be continued to be predominant demand. 2011 will be the transitional year of Home Inns’ as we invest in goals and balance profitability.

And with an accelerated growth trend of 206 to 208 net hotels, Home Inns’ is set to achieve its initial goals to reaching 1,000 opened hotels by 2011. This will lay a solid foundation for further widen geographic coverage and deeply penetration into existing markets for many years of foreseeable future. In addition, our newly launched initiative of achieving 50 Yitel hotels within the next four or five years in China will provide a platform for a meaningful multi-brand strategy for Home Inns’ to capture the vertical growth potentially presented by the expansion in Chinese economy and the travel industry.

On this note, I would like to turn the call over to Huiping, who will walk us through the financials. Huiping?

Huiping Yan

Thank you, David, and hello to everyone on the call. I am pleased to discuss our fourth quarter and annual 2010 results, then provide guidance for the first quarter and 2011. As I take you through the numbers, please note that I will only speak in RMB terms unless specifically mentioned.

For the fourth quarter of 2010 Home Inns’ total revenue was RMB797.9 million, increasing 14.2% year-over-year. Total revenues for the year were RMB3.17 billion, an increase of 21.8% year-over-year. The growth in revenue was primarily driven by an increase in number of hotels in operations and higher RevPAR year-over-year. The increase in fourth quarter and full-year 2010 RevPAR year-over-year was mainly due to increase in average daily rates as a result of list price increases 3% to 5% that went into effect, a majority of our mature hotels since March of 2010. Shanghai World Expo premium also contributed to the year-over-year increase in RevPAR.

Total revenue from leased-and-operated hotels for the fourth quarter of 2010 was RMB724.9 million, representing a 10.4% year-over-year increase and 9.9% decrease sequentially. For the full-year of 2010, total revenues from leased-and-operated hotels were RMB2.91 billion, an 18.6% increase year-over-year. The increase year-over-year were driven mainly by a greater number of hotels in operations and a higher RevPAR. The sequential decrease is due to a seasonally slower business pattern in the fourth quarter first post Expo decreases in travel volume. During the fourth quarter of 2010, Home Inns’ had a net of 64 more leased-and-operated hotels in operation than in the same period of 2009.

Total revenues from franchised-and-managed hotels for the fourth quarter of 2010 was RMB73 million, a 71.9% increase year-over-year. The revenues from franchised-and-managed hotels for the full-year was RMB256.8 million, or 8.1% of total revenues, up from 5.7% of total revenues in 2009. We opened 42 new franchised-and-managed hotels during the fourth quarter of 2010, and had a net of 138 more franchised-and-managed hotels in operation at the end of the year than that of 2009.

Our total operating cost and expenses without stock-based compensation expenses were RMB633.2 million for the fourth quarter and RMB2.39 billion for the full-year. Total operating cost and expenses are generally driven by the number of hotels in operations and the number of hotels under construction during any period of time. The majority of these costs and expenses came from our leased-and-operated hotels. Total leased-and-operated hotel costs for the fourth quarter of 2010 were RMB577.4 million or 79.7% of the leased-and-operated hotels total revenue. This was an increase from the 77.9 % in the same quarter of 2009 and 63.3% from the previous quarter.

The year-over-year increase as a percentage of a leased-and-operated hotel revenues was primarily due to a higher pre-opening costs for hotels under construction. Pre-opening costs for the fourth quarter of 2010 was RMB20.8 million compared to RMB3.6 million in the same period of 2009. The sequential increases was mainly due to a smaller revenue base from normal seasonality and lower travel volume post World Expo.

For the full-year of 2010, total leased-and-operated hotel costs were RMB2.17 billion or 74.7% of the leased-and-operated hotels revenue compared to 81.1% in 2009. The improvement year-over-year was attributable to a larger revenue base and smaller increases in per hotel operating costs in relationship to revenue increases. The company’s sales and marketing expenses for the fourth quarter was RMB7.3 million or 0.9% of total revenue compared with RMB9.4 million or 1.3% of total revenues in the same period of 2009.

For the full-year of 2010, sales and marketing expenses were RMB33.3 million representing 1.1% of total revenues compared with RMB30.5 million or 1.2% of total revenues in 2009. General and administrative expenses without share-based compensation expenses and before reimbursable General Manager’s personnel cost for our franchised-and-managed hotels were RMB35.1million or 4.4% of total revenues for the fourth quarter and RMB138.9 million or 4.4% of total revenue for the full-year. This measure compared with the 4.8% of total revenues of fourth quarter of 2009 and 4.8% of total revenues of the year of 2009.

These improvements represented positive operating leverages as we continue achieving scale and improving productivity. With revenues and cost discussed above, the company delivered an income from operations excluding share-based compensation expenses of RMB116.1 million for the quarter, compared to an income of RMB92.9 million in the same period of 2009. Income from operations for the full-year was RMB583.7 million or 18.4% of total revenues compared with 10.5% for 2009.

The year-over-year margin improvements resulted from upward price adjustment action taken started in March of this year as described earlier from Shanghai World Expo price premium from increased portion of franchised-and-managed hotel revenue with substantially higher margin than leased-and-operated hotels and from effectively managed hotel opening operating costs level as well as the leverage of SG&A economy of scale.

Adjusted EBITDA for the fourth quarter excluding any foreign exchange losses, share-based compensation expenses, gain from repurchase of convertible bonds, loss from fair value changes of convertible bonds and issuance costs for convertible bonds that was issued in 2010 was RMB201.3 million or 25% of total revenues. These same measures for 2010 increased 59.1% to RMB918.8 million with a margin rate improvement of 6.8 percentage points year-over-year.

Adjusted net income for the fourth quarter was RMB102.2 million and RMB466.2 million for the full-year of 2010 representing a 112.9% increase from 2009 on a full-year basis. Adjusted diluted earnings per ADS was RMB2.4 or $0.36 for the fourth quarter or RMB11 per ASD and $1.67 for the full-year.

During the quarter, the company generated a net operating cash flow of RMB209.7 million, representing a 14.9% increase year-over-year. Capitalized expenditures were RMB221.1 million for the quarter and related cash spent was RMB167.8million, including settlement of capital expenditure payables.

The reported full-year net operating cash flow was RMB900.2 million and capitalized expenditures were RMB546.4 million and the related cash spent was RMB373.5 million. As of December 31,2010 Home Inns’ had cash and cash equivalence of RMB2.4 billion and outstanding balance of convertible bonds of RMB159.4 million associated with the 2007 issuance, our long-term financing liability resulted from 2010 convertible bond issuance of RMB1.2 billion measured at fair market value.

Home Inns’ had a strong cash generation capability to adequately fund our future leased-and-operated hotels growth as well as maintaining our competitive scale throughout China. We expect to open 260 to 280 new hotels in 2011. Looking now at our guidance for 2011, we expect to achieve a revenue range of RMB755 million to RMB775 million for the first quarter of 2011 and a revenue growth of 18% to 20% year-over-year for the full 2011.

Now without further delay, let’s open the line to questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Your first question is from the line of Chris Woronka with Deutsche Bank. Please proceed.

Chris Woronka – Deutsche Bank

Hi good morning guys.

David Sun

Good morning, Chris.

Huiping Yan

Hi, Chris.

Chris Woronka – Deutsche Bank

When we think about your unit positions in 2011, how should we think about the timing and split of those in terms of the leased-and-operated franchise, in another words would leased hotels see a little bit more backend loaded, front-end loaded relative to the franchise?

Huiping Yan

In the normal – under the normal opening schedule, our leased-and-operated hotels target of let’s say this year 260 to 280, a 100 to 110 leased-and-operated, about 30% to 35% is scheduled to or planned for the first half of the year and then the franchise side of the model, because we have lesser control of the opening schedule, it would fairly evenly spread out throughout the year, but it is something that we cannot really pinpoint.

Chris Woronka – Deutsche Bank

Okay, that’s fair. And then on the Yitel, David, I think you mentioned a five year target of 50 hotels, I guess it seems pretty modest. What might make you think about adding more hotels in that?

May Wu

Hi Chris, this is May. As we are still in the trial period for this new brand, for example, this year we are planning for three or four unit opening and we are working very diligently towards that and then we would accumulate experience and know how to go over time. So at this time whether it will be 50 or more, I don’t think we have been overly accurate estimate that we think 50 is what we feel comfortable. We believe the market is much bigger than that, but there is a higher risk finance [ph] in terms of site selection, higher capital spending as well as design and conversion capabilities.

So we’re gradually building up these capabilities and hopefully we will achieve success overtime.

Chris Woronka – Deutsche Bank

Okay, thank you May. And your expectation at this point is that the majority of those will be leased?

May Wu

It will be – we will adopt either the leased model or the franchised model or possibly joint-venture model for the Yitel brand.

Chris Woronka – Deutsche Bank

Okay, but the first three or four are leased, right?

May Wu

That is correct.

Chris Woronka – Deutsche Bank

Okay, great. And then, just I guess, when you might think about acquisitions in general, what are some of the most important things you’re looking at and how do you value that and how important is another brand pipeline if you were looking at any other brand?

David Sun

Yes, I think it’s – we always mentioned that our co-strategy for development is organic growth. We’re still very steep our organical growth strategy in the near future. But I think it’s – acquisition always certain opportunity in the market. So we will keep our eyes to closer look at any opportunity in the market, but I think in general we will very disciplined to looking for how we can maximize the – I would could best values that’s the first local principal for we look at any deals. I think May, can give a little bit detail how we can look at acquisitions.

May Wu

I think just to add on what David has said, we are very keen on delivering value to investors. So that is the top consideration. And aside from that from operational perspective, we have this Home Inns brand that’s still growing, we have the Yitel brand and somewhere down the road we may – a few years down the road, we may consider launching another brand. So we don’t need to do any acquisitions to maintain our healthy growth. So and the acquisition would have to be valid in (inaudible) for our operation and for our shareholders. So that’s our principle and that is our discipline.

Chris Woronka – Deutsche Bank

Okay, perfect. And just finally just I guess Huiping can you remind for the pre-opening costs in the fourth quarter, sorry if I missed it?

Huiping Yan

Yes, pre-opening in the fourth quarter was RMB20.8 million.

Chris Woronka – Deutsche Bank

Okay, very good. Thank you.

Huiping Yan

Thanks Chris.

David Sun

Thanks.

Operator

Your next question is from Allen Gee [ph] with Oppenheimer. Please proceed.

Allen Gee – Oppenheimer

Hi good morning everyone, congratulations on very strong quarter.

Huiping Yan

Thank you Allen.

Allen Gee – Oppenheimer

First of all, I want to ask within your total existing 818 hotels what’s the mix of geographic location between tier one, tier two and the tier three cities?

May Wu

Okay, of our total of 818 hotels, we have close to 22% or 23% in the first tier. And for the second tier, we have about 55% and then the rest are in the third tier.

Allen Gee – Oppenheimer

Great. And for your 2011 your opening hotels, what’s the mix of geographical locations?

May Wu

It will be very similar to the current existing proportion.

Allen Gee – Oppenheimer

Got it. And then could you talk a little bit more about the current inflation impact on your existing hotels on a per room basis. How much percentage should we see per room basis, the cost does spike, and also have you started to adjust to your ADRs to help offset the inflation pressure?

Huiping Yan

This is a very good question and let me address it in the broader terms here. First of all, inflation is negative to our business for purposes of cost considerations. We watch very closely on how inflation impacts our operating costs. With that said, we look closer at our cost structure. We’ll find that a portion of our costs are more sensitive to inflation. In other words, labor costs for example, however rents as a relatively large portion of our operating cost is typically fairly fixed and stable and it is also of course represented in our financials on a straight line basis. It is only as we add new hotels, we see a slight increase given our large hotel portfolio base.

When inflation persists, we would be able to take some price actions to protect the margins, a low to single – a low single-digit price increases, would be sufficient to absorb the inflationary impact on our cost structure. Meanwhile we would be continuing looking at implementing initiatives for opportunities that we find to improve productivity, hence also absorb inflationary costs impact.

Second, inflation is also positive to our business for purposes of pricing strategies. However, we continue to watch very carefully as such opportunities to where our customer needs to accept this type of increases. And so the path we believe and also looking at our experience, we believe a moderate low single-digit increases that are inflationary like from time-to-time are acceptable to our value conscious customers.

So with all just said our overall goal in protecting our margin as well as carefully plan for impact – plan for absorbing the impact of CPI will continue to help the business going forward into the future.

Allen Gee – Oppenheimer

Thanks, that’s very helpful. Well, I am wondering if you have a CapEx estimate for 2011.

Huiping Yan

We are planning for 260 to 280 total hotels, part of that is leased-and-operated which will have a CapEx requirement. On a per hotel basis, we have an estimate to RMB6 million to RMB7 million in costs. And that will give us a range of CapEx expenditure between RMB600 million to RMB700 million for 2011.

Allen Gee – Oppenheimer

Okay, thank you. Lastly, you were talking about acquisition, is there any – just want to ask you is there any near-term acquisition targets in your pipeline in addition to the Motel 168?

May Wu

First of all, we are not in a position to discuss specifics, but as a general practice corporately while David mentioned earlier, we have an organic growth as our focus or strategic focus. We would be looking at M&A opportunities, again going back to our principal it needs to be shareholder value enhancing. And we are very disciplined in valuation, in integration risk considerations. And all these will be in play as we look at opportunities as they present themselves.

Allen Gee – Oppenheimer

Okay, great. Thank you.

Operator

Your next question is from the line of Billy Ng with Bank of America. Please proceed.

Billy Ng – Bank of America

Hi good morning. Basically I have two questions, one is can you tell us about the current trend of the RevPAR, especially we heard some data after Chinese New Year, there is a general improvement of the occupancy and also the room rates. Can you tell me a bit more specific about that and also will that lead to or give us a bit more guidance on how much room rates you can see based on the current trend and going forward towards 2011. And the next question I have regarding to the interest costs, given after the CB issuance, can you tell us a bit more about interest costs for 2011, and how we should see it in terms of the effective interest costs?

Huiping Yan

Sure, thank you Billy. In 2010, we operated in a very positive economic environment. And together with the World Expo price premium that impacted our Shanghai hotel that is about 10% of our total portfolio. The company achieved an overall RevPAR increase of 12% from RMB146 to RMB164. And with the same stable operating conditions and under this type of environment which we do anticipate, and also take into consideration with increased new hotels added to the portfolio, we expect our overall RevPAR to decrease in 2011 or putting in other words adjusted for the one-time non-recurring event of Expo impact, our RevPAR would most likely say flat or a trend down in 2011.

However beyond 2011, our RevPAR would resume upward trend as the structure of our new versus mature hotel improve going forward.

Billy Ng – Bank of America

Thanks. So do you see any pickup or improvement in the last few weeks of your hotel portfolio? Because I think since after the Expo, a bit of the softness we saw in November, December, early of January.

David Sun

Yes, I think you’re right, I think it’s special up to [ph] after 15 days of Chinese New Year. That’s a traditional pickup from business and leisure market in China. So we see in turn that we see that pickup from a strong pickup after Chinese New Year. That’s the truth.

Billy Ng – Bank of America

Thanks, okay.

Huiping Yan

And then Billy to your second question, we have our coupon rate on the convertible bond of 2%. So we estimated around RMB25 million interest expenses associated with that in 2011.

Billy Ng – Bank of America

Okay, does it require to reduce that effect of interest costs of anything or do you think that 2% coupon rate is good enough for the interest costs forecast?

Huiping Yan

It should be sufficient.

Billy Ng – Bank of America

Okay, thanks.

Operator

Your next question comes from the line of Adam Krejcik with ROTH Capital Partners. Please proceed.

Adam Krejcik – ROTH Capital Partners

Hi everyone. Thanks for taking my call. My first question, can you just maybe discuss is there much discrepancy between the performance of your franchised hotels versus your leased-and-operated hotels, I know you don’t break that out but just generally speaking?

David Sun

Yes, in general speaking it’s very similar with the performance if their location are very similar – in a similar city or similar location. Their performance is very similar.

Adam Krejcik – ROTH Capital Partners

Okay, and then the backlog and the demand for franchise, we can see very strong for you guys, I just wonder has there been any thought or consideration about potentially increasing the upfront payment you charge from a franchisee or that annual recurring royalty fee, is there any room to increase that with being a new franchisees or is that still some time off in the future?

David Sun

Yes, I think it’s – we would study on that but I think based on today’s market condition and also the competition in the market, we still would be keep our current recurring base fee structure.

Adam Krejcik – ROTH Capital Partners

Okay. And then in terms of the 2011 guidance, I think Q1 implied about 10% to 13% year-over-year growth and the full-year implied 18% to 20%. Is that a function of how many hotels you’re opening in Q1 or do you kind of see a pickup throughout the year just trying to get an understanding for where – which quarters are going to be trending higher versus Q1?

Huiping Yan

Sure. The hotels that we opened in later part of 2010 were mostly in the fourth quarter of 2010. We’ll still be ramping up in the first quarter or even into part of the second quarter of 2011. So hence our guidance is really taken into that consideration. As these new hotels start ramping up, we will be seeing in the second half of the year better performances.

Adam Krejcik – ROTH Capital Partners

Okay, and then just in terms of margins, I know you’ve talked a little bit about, some pressure this year with the Shanghai Expo, and the dilution from new openings. So can you perhaps talk about or walk us through again what’s the key drivers are for a rebound in 2012 and beyond getting back to some of the levels that you put up in 2010? And also did I understand correctly when you said the development schedule for 2012 would be more normalized or is that to assume that you won’t be opening 270 hotels into 2012 or is that still too far to look out to?

Huiping Yan

First of all, you are correct that there are some key drivers impacting our margin in 2011 and particularly so the new hotel as they come in and ramp-up, it will have diluted impact on our margins. And then also this is consistent with our investment or growth plan that is being accelerated. There will be new and more new hotels under constructions that brings about pre-opening costs which is at much higher levels than 2010. That will also impact the margins. And then if we look forward into 2012, you are absolutely correct, as we resume our normal opening schedules, the maturing hotels will contribute very nicely to that bottom line and at the same time absorbing the continued impact coming from new hotels.

So more even and normal opening schedule, it will create a proportionally healthy structure between new and existing matured hotels. So therefore our expectations for 2012 and further under the similar growth plan that we set out for 2011 which is 260 to 280 hotels, the unit growth will be very substantial as well as the margin expansion.

Adam Krejcik – ROTH Capital Partners

Okay, that’s helpful. Thank you very much.

Huiping Yan

Thank you.

Operator

(Operator Instructions) Your next question is from the line of Justin Kwok with Goldman Sachs. Please proceed.

Justin Kwok – Goldman Sachs

Thanks for taking my question, one quick one and another one on the strategy. On the quick side, I saw that the sequential drop in the personnel cost, if I missed it early, I just want to get sense on how do you achieve it, is there anything that in the fourth quarter, you get more of a performance based salary to your (inaudible) revenues, that’s my first question, thanks.

Huiping Yan

Yes, the labor cost decreased sequentially in 2010. It was mainly driven by the structural enhancement that we started putting in place. And then also bonus accruals is also another impact that we’ve made some adjustment to the personnel costs. From a hotel – per hotel operating level, the personnel costs actually increased slightly close to low single-digit and that is normal as we expected under the inflationary type of environment where minimum wages are increasing across the country.

However the total revenue base as well as the cost structure is providing us assurance that the personnel cost is growing at a reasonable pace.

Justin Kwok – Goldman Sachs

Thanks, that’s helpful. And my other question is on your position in industry, obviously you’re now having market – the largest share in the market. How do you view your position here and how do you think that you eventually change your market share or leadership in the market and what’s your view in terms of the your fair time [ph] option of these? Thanks.

David Sun

Yes, I think it’s – first of all we believe the market is very huge to (inaudible) players. Then I think in today we have achieved a very strong position compared with the second or third players [ph] in the market. Then we will still accelerate our gross plan start on 2011 to open 260 to 280 hotels per year for the next two or three years. So by being that we believe that we have more ability, we are in the most of our geographic coverage in China. We understand every local market especially in the second and third tier market. So we do have – we do generate a lot of those capacity internally to further accelerate our growth. So we will keep on doing strengthen to maintain our market position, we believe we can do that.

Justin Kwok – Goldman Sachs

All right, thank you, and one more thing is as Huiping mentioned about [ph] you didn’t see much higher pre-opening cost in 2011 and do you have any specific guidance on that for 2011 pre-opening costs? Thanks.

Huiping Yan

Sure. The per hotel pre-opening cost is estimated somewhere around RMB800,000 and with 100 to 110 hotels target for 2011 as well as some hotels would be under construction for openings in 2012. We estimate the pre-opening costs would near almost double what the level is in 2010. And for 2010 we had RMB46.6 million of pre-opening costs.

Justin Kwok – Goldman Sachs

Thanks. Thanks a lot.

Operator

Your next question is from the line of Fawne Jiang with Brean Murray. Please proceed.

Fawne Jiang – Brean Murray

Good morning, thank you for taking my questions. First question is regarding the key components of your operating expenses. Could you give us some color on each of these items? Second, regarding the rental leases, for the new hotels we’re seeing like increasing rental lease compared to the older hotels. Also on the staff costs, just wonder whether Home Inns’ will have say frontline salary increase sometime in 2011, if it is around what time? And lastly for the consumables in the fourth quarter, it seems like it increased significantly both on a year-over-year as well as quarter-over-quarter basis. Just wonder whether that’s potential impact from the inflation and how should we deal with that item for 2011?

Huiping Yan

Sure, rental expenses let’s consider for the total portfolio – on a total portfolio basis. The financial reporting we are required at straight line but from a more rental term or rental expense term basis as we are going into the third tier year of the city, their rental costs are relatively lower than the upper tier and the first tier and the second tier rental levels. And CPI increases are more impact for on consumable goods as opposed to overall for the real estate that is appropriate for budget hotel development.

So what we are seeing on a cost structure, the rental expenses are flat or even slightly going down as opposed to – as compared to increase in revenue base. For a matured hotel we are still seeing around 29% to 30% of the rental and utilities costs as a percentage of leased-and-operated hotel revenues.

On the personnel side of the equation, the personnel costs are – it’s one of the component that is more accessible to cost inflation, however we are still seeing a relatively stable level or reasonable level increases and with our price adjustments, we have absorbed those increases in our personnel costs. Consumables increases or a jump in the fourth quarter is largely related to the stock comp that we did for new hotel opening in that quarter.

Fawne Jiang – Brean Murray

Got it. It’s very helpful. Just one confirmation, you said its 29% to 30% of the total rental and utility – actually from the utility right?

Huiping Yan

The rental and utility costs together represent about 29% to 30% I believe in operated hotel revenues.

Fawne Jiang – Brean Murray

Okay.

Huiping Yan

And also the rent and utility because of the seasonality impact on the utility costs, it would vary from time-to-time. So between 25% to 30% range of the total rental and utility costs would be associated with the utility.

Fawne Jiang – Brean Murray

Yes, got it. Quickly just one more quick questions is on the pre-opening costs, what’s the expected pre-opening costs for the first quarter?

Huiping Yan

We don’t have the specific number that we can communicate now but again for the full-year of 2010 was increased of hotel opening, we are looking for near double the level of 2010.

Fawne Jiang – Brean Murray

Got it. That’s all my questions. Thanks.

Operator

Your next question is a follow-up from the line of the Billy Ng with Bank of America. Please proceed.

Billy Ng – Bank of America

Hi, thanks for taking my question again. Basically, just one follow-up on – questions on the industry dynamic competition landscape. Can you comment on like because like based on the news report we see that several parties are interested in Motel 168. So can you comment let’s say if some other parties get the Motel 168, would you change your growth strategy meaning like that would you accelerate the number of hotels opening this year, if there is no acquisition on your side? And also like can you also briefly comment like in terms of getting new locations I think, you already get 260 to 280, so like – and have you seen any more challenging or it’s still pretty much the same in terms of finding suitable locations for opening new hotels and do you see that kind of environment, how much longer than can be maintained in terms of getting new location without overpaying or without building up the price on those real estate properties?

May Wu

Thanks for your question. This is May. With regards to acquisition strategy just in overall, as David and Huiping have already mentioned, one, we are very shareholder value conscious. Two, we are disciplined when looking at any acquisition. We cannot comment on the specifics, but put it in this way, our yearly hotel opening plan is that 260 to 280. And a couple of years down the road, Yitel will also add another more significant growth engine to us. And it’s also possible that we may launch another brand few more years down the road.

So we are very confident and comfortable with our growth prospects with or without acquisitions. So whether or not somebody else does complete acquisition, we don’t think it would change the industry dynamics significantly in the long run. Therefore we will continue to pursue with our own growth initiatives and be disciplined when considering any acquisition.

And to answer your second question with regards to site selection. We are now in over 200 [ph] cities. So to open 260 to 280 hotels basically it’s one or two hotels per city and we are entering many second tier and third tier cities, where we see the economic growth is actually faster than the first tier and main second tier cities. So although it’s always competitive and it’s never easy to develop new sites, we are currently very confident and comfortable with our growth prospect.

Billy Ng – Bank of America

Thanks. So just (inaudible) very good answer. So I just want to make sure I understand correctly is, it doesn’t matter if you will have the acquisition or not this year. So like the growth target of 260 to 280 likely to be remained the same.

May Wu

It will be remained.

Billy Ng – Bank of America

Okay, thanks a lot.

Operator

Your next question is from the line of Lin He with Morgan Stanley. Please proceed.

Lin He – Morgan Stanley Asia Limited

Hi good morning David, Huiping and May and Ethan.

David Sun

Good morning.

Huiping Yan

Hi good morning Lin.

Lin He – Morgan Stanley Asia Limited

Hi first is a follow-up question regarding the RevPAR outlook for this, you mentioned, well you mentioned excluding the impact of Expo you expect flat to decrease in RevPAR this year. Then what’s your expectation on the mature hotels for this year, do you think that the RevPAR for mature hotels this year can increase?

Huiping Yan

Our goal or commitment is to manage our matured hotels to maintain the RevPAR as a minimum and given a better economic condition or opportunities we may see slight increases for our matured hotel as a group, without Expo of course that is one-time event that we cannot repeat.

Lin He – Morgan Stanley Asia Limited

Okay, got it. And then two questions on the 4Q results, firstly, for the 4Q RevPAR you achieved, is it possible to book down into RevPAR of the Shanghai hotels versus non-Shanghai hotels?

Huiping Yan

We have done some estimation, although this is not an exact science and we can really track that but we’ve looked at hotels performance outside of Shanghai compared to hotel performance in Shanghai. The estimated Expo impact for the month of October of course within the quarter is about RMB3 on the RevPAR level.

Lin He – Morgan Stanley Asia Limited

Say it again, what the (inaudible) earnings?

Huiping Yan

The RMB3 comes from the Expo premium impacting the hotels in Shanghai for October because the Expo ended in October. So on a full quarter basis, they are about RMB3 benefit coming from Expo premium.

Lin He – Morgan Stanley Asia Limited

Per hotel, per Shanghai hotel. Is that right?

Huiping Yan

It’s the total.

Lin He – Morgan Stanley Asia Limited

Total.

Huiping Yan

Total company’s RevPAR.

Lin He – Morgan Stanley Asia Limited

Okay.

Huiping Yan

RMB3 impact.

Lin He – Morgan Stanley Asia Limited

Okay, all right got it. And then last question is can you explain a little bit on why we have that loss from fair value change in CB?

Huiping Yan

Sure. I am going to pretend to be a valuation expert here, but our seriousness [ph] the valuation takes in a consideration factors. One is the interest rate. Two, is the foreign exchange rate. Third is the stock price and then fourth is the volatility trading of the stock prices, at the time of issuance as well as at the end of the year. The valuation is done on balance sheet period, is on a quarterly basis or on an annual basis as we report. So with all these factors taking into consideration, the value of the option itself including the convertible feature at the end of the term, creates a fair value differences and therefore we have a loss of RMB9 million at the end of 2010.

Lin He – Morgan Stanley Asia Limited

Okay, got it. That’s helpful. That’s all my questions. Thanks.

Operator

Next question is from the line of Noah Hudson with Guotai Junan. Please proceed.

Noah Hudson – Guotai Junan

Hi good morning, thanks for taking my call.

May Wu

Hi.

Huiping Yan

Hi.

Noah Hudson – Guotai Junan

Questions on popular topics the pre-openings costs, I was trying basically to get a grasp on that, how to think of historically and it seems it’s quite variable for last few quarters the pre-opening costs versus the hotels under construction for the leased-and-operated hotels added during that quarter. So do you have any guidance of what’s the best way to think of the pre-opening costs, what they are most closely associated with?

Huiping Yan

Yes, I believe the first of all we look at the per unit level of pre-opening costs for each of our leased-and-operated hotels, we have an average about RMB800,000 per hotel. Normally that the second factor we consider is the construction period. And then typically it takes about four to six months, and it of course again varies from a location to location because each property’s conditions for conversion are different from one another.

And then thirdly, our opening schedule, one is if we resume a normal opening schedule throughout the year, we will have a consistent pipeline coming through the development process. So hence the pre-opening costs would be fairly evenly spread. With that said, I do want to point out that the winter season is normally a not construction proof, meaning we would avoid when possible constructing during the winter season because of the construction costs would increase. So with all these taking into consideration and particularly so if you’re modeling for future 2011 and beyond, the opening schedule will be fairly evenly spread across the year given the fact that we have planning for 30% to 35% of our opening of the leased-and-operated hotel for the total year target in the first half of the year. And then we should be able to model a pre-opening cost pattern throughout the year.

Noah Hudson – Guotai Junan

Okay, thanks. And which line item on the income statement are the pre-opening costs put into?

Huiping Yan

The pre-opening costs are spread into the categories of hotel operating costs, meaning rents and utility, personnel costs, consumables and others.

Noah Hudson – Guotai Junan

Okay, got it. And any idea on what the pre-opening costs for the Yitel will be?

May Wu

The Yitel will have a substantially higher pre-opening costs per hotel, due to the higher rent because of larger size, as well as somewhat of a longer conversion period. Although just to remind you, although we do get a period of free rental period during the conversion, accounting life we had to recognize rental starting from the beginning of conversion period. So because of that, Yitel, on average will have two to three times of pre-opening costs per hotel, compared with the average Home Inns hotels. So the total pre-opening expenses for potential Yitel opening has been taken into account with the RMB90 million plus pre-opening costs we encountered this year.

Noah Hudson – Guotai Junan

Okay. Thanks, that’s all my questions. Thank you.

Operator

Unfortunately ladies and gentlemen, that is all the time we have for questions. I’d now like to turn the call over to Home Inns’ management for closing remarks.

May Wu

Thank you everybody again for your interest in Home Inns’ and again as we look into the 2011, we will focus on operating excellence and continued effort on our development and reaccelerate our growth into 2012 and beyond. Thank you very much, and we look forward to discuss with you our future results soon.

David Sun

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s call. The presentation has ended. You may now disconnect.

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