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Executives

Ethan Ruan – IR Manager

David Sun – CEO

Huiping Yan – CFO

May Wu – Chief Strategy Officer

Analysts

Chris Woronka – Deutsche Bank

Allen Gee – Oppenheimer

Lin He – Morgan Stanley

Justin Kwok – Goldman Sachs

Adam Krejcik – ROTH Capital Partners

Fawne Jiang – Brean Murray

Noah Hudson – Guotai Junan

Hairong Zhang – Miller Tabak

Home Inns & Hotels Management Inc. (HMIN) Q1 2011 Earnings Call May 9, 2011 9:00 PM ET

Operator

Hello and thank you for standing by for Home Inns 2011 first quarter 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, Home Inns’ Investor Relations Manager. You may proceed sir.

Ethan Ruan

Hello everyone, and welcome to our earnings conference call. Our first quarter 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 who will be further discussing our performance for the past quarter, and May Wu, our Chief Strategy Officer and Chief Executive Officer of Yitel brands. After their 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 as 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 law.

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 for the first quarter of 2011. We achieved our operational targets for the quarter, despite a seasonally low quarter and overall normal and a stable operating environment made a possible for our mature hotels to achieve operational improvement year-over-year.

Our new hotels including those opened in later first quarter of 2010 are ramping up with expansions and are gearing up to make positive contributions to our portfolio for both revenues and margin in the second quarter and the long-term. What is even more excited is that our diverse pipeline has become strong which adds further confidence for us to achieve expansion target for this year and a growth plan in the longer term.

There are no surprise in our hotels performance for the quarter, as anticipated quite a number of the new hotels in their relatively earlier stage of ramp-up during a seasonally low quarter caused unfavorable impact to our operating results when compared year-over-year. This new hotels incurred full operating cost without full revenue contributions. In addition, there were significantly more new leased-and-operated hotels under construction during the quarter than the same period a year ago.

Therefore the pre-opening expense charges create a further account and burden to our P&L. Total revenues for the first quarter increased 10.8% year-over-year to RMB756.6 million. Overall average daily rates increased 4% year-over-year from RMB159 million to RMB165 million. This improvement was offset however by the decrease in occupancy rates from 90.5% a year ago to 85.1% in the first quarter of 2011.

The decrease in occupancy rate year-over-year was mainly driven by more new hotels in their early stage of ramp-up during the quarter as discussed earlier. Sequentially ADR and occupancy rates were down due to the seasonality and absence of one-time benefit from the Shanghai World Expo.

As a result, RevPAR was RMB140 million in the first quarter of 2011 compared with RMB144 million in the same period in 2010 and RMB156 million in the previous quarter. There were 569 hotels that had been in operations for at least 18 months in the first quarter of 2011. RevPAR increased to RMB149 million from RMB147 million for the same group of hotels in the first quarter of 2010.This favorable comparison was mainly achievable to a higher ADR and a reflecting a reasonably healthy operating environment.

On the development front, Home Inns opened 32 new hotels including one new leased-and-operated hotel and 31 new franchised-and-managed hotels during the quarter. As of March 31, 2011 Home Inns operate across 150 cities in China with a total of 848 hotels, net of two closures. In addition, there were another 71 leased-and-operated hotels and 107 franchised-and-managed hotels contracted all under construction. We are on track to open a total of 260 to 280 hotels this year with 100 to 110 leased-and-operated hotels and 160 to 170 franchised-and-managed hotels.

As of March 31, 2011 Home Inns had 3.93 million active non-corporate members representing a 41% increase from 2.78 million as of March 31, 2010. Room nights sold to active non-corporate members consistently represent over 50% of total room nights sold. I want to take this opportunity to reiterate our positive views of our growth strategies and our consistent execution.

First quarter of 2011 could be viewed as challenging by certain measures, even at the time of the new hotels ramp-up normal but nevertheless low seasonality and increased investment in the development. However, we are optimistic about over our long-term stability and growth perspective of Chinese economy and the travel industry. We are energized by the strong momentum we achieved in new hotels development. Unfavorable comparative [ph] we expect and well understood, will not distract us from the focusing our execution and delivery.

We are moving through the record of 2011. We are targeted to reach 1,000 hotels organically this year. Our franchised hotels program will continue to strength and become increasingly important part of our portfolio. Our (inaudible) brand of Yitel hotels will achieve scale and efficiency in the next three or four years laying a strong foundation of our multi-brand strategy.

Our efficient operating structure, we continue to generate productivity and economy of scale. Home Inns is well positioned for a long-term profitable growth.

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 first results, and then provide guidance for the second quarter. As I take you through the numbers, please note that I will only speak in RMB terms unless specifically mentioned.

For the first quarter of 2011 Home Inns’ total revenue was RMB756.6 million, increasing 10.8% year-over-year. Total revenues from leased-and-operated hotels for the first quarter of 2011 were RMB687.3 million, representing a 7.9% increase year-over-year and 5.2% decrease sequentially. The year-over-year increase was mainly driven by our greater number of hotels in operation with an overall higher ADR despite a lower occupancy rate. The sequential decrease was largely due to a seasonality and absence of additional revenue from the Shanghai World Expo. During the first quarter of 2011, Home Inns opened one new leased-and-operated hotel and involuntarily closed one leased-and-operated hotel due to municipal city planning and rezoning.

Total revenues for franchised-and-managed hotels for the first quarter were RMB69.3 million, representing a 51.1% increase year-over-year and a 5.2% decrease sequentially. The year-over-year increase in revenues from franchised-and-managed hotels for the quarter was mainly driven by a greater number of such hotels in operation. The sequential decrease was due to a reduced fee revenue base driven by seasonality and absence of Shanghai World Expo. We opened 31 new franchised-and-managed hotels during the first quarter of 2011, and we terminated one franchised-and-managed hotel agreement due to non-compliance by the franchisee.

Total operating costs and expenses without share-based compensation expenses for the quarter was RMB659.9 million, up 15.8% from the same quarter last year. Before one-time spending of RMB11.5 million on a potential strategic opportunity, total operating costs including increased pre-opening expenses were within our expected normal range. Total leased-and-operated hotel costs for the first quarter of 2011 were RMB592.7 million, or 86.2% of the leased-and-operated hotel revenues.

This compares to 81.9% for the same quarter in 2010 and 79.7% for the previous quarter. The year-over-year increase was due to higher pre-opening costs of RMB14.3 million for hotels under constructions during the quarter and a higher dilutive impact from new hotels operating with full costs in place for limited revenue contribution as they ramp-up during the quarter. The sequential increase was mainly due to a smaller revenue base during the first quarter.

Compensation and benefits for general managers of franchised-and-managed hotels for the first quarter was RMB10.3 million or 14.8% of franchised-and-managed hotel revenue, this compared to that of 21% in first quarter of 2010 and 16.5% in the previous quarter.

The company’s sales and marketing expenses for the first quarter of 2011 were RMB10 million or 1.3% of total revenues compared with 1.1% of the same period in 2010 and 0.9% for the previous quarter. General and administrative expenses for the first quarter of 2011 were RMB64 million including the deduction of RMB11.5 million one-time spending on a potential strategic opportunity.

General and administrative expenses excluding share-based compensation expense and before one-time spending, were RMB35.5 million or 4.7% of the total revenues, compared with 4.6% of the total revenues in the same period of 2010, and 4.6% in the previous quarter. The above discussed revenues and costs resulted in an income from operations for the first quarter of RMB31.5 million.

Income from operations excluding share-based compensation expenses and one-time spending was RMB16 million, compared to RMB71 million in the same period of 2010, and RMB116.1 million in the previous quarter. Adjusted EBITDA was RMB141 million or 18.6% of total revenues, decreased 4.1 percentage points year-over-year. Adjusted net income reduced by previously mentioned one-time charges but excludes any share-based compensation expenses. Foreign exchange loss and gain from fair value change of convertible notes were RMB36 million for the first quarter of 2011 compared to RMB55.2 million for the same period a year ago.

Adjusted diluted earnings per ADS were RMB0.79 or $0.12 in U.S. dollars. During the quarter the company generated a net operating cash flow of RMB55.4 million compared to RMB80.2 million in the same quarter of 2010. The decrease was mainly driven by aforementioned higher costs, relative to a lower level of overall revenues.

Capitalized expenditures for the quarter were RMB123.3 million and related cash paid for capital expenditures during the quarter was RMB145.4 million. As of March 31, 2011 Home Inns had cash and cash equivalence of RMB2.29 billion. The outstanding balance of convertible bonds issued in 2007 was RMB159.6 million including principal and accrued interest. Outstanding balance for long-term financial liability measured at fair value arose from the convertible notes issued in December 2010 was RMB1.2 billion.

Moving onto our outlook for the second quarter, we expect total revenues to be in the range of RMB905 million to RMB925 million representing a 12% to 15% year-over-year increase. Our revenue guidance for the full-year which is 18% to 20% growth year-over-year remains unchanged.

Now let’s open the call to questions. Operator?

Question-and-Answer Session

Operator

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

Chris Woronka – Deutsche Bank

Hi, good morning David, Huiping, and May.

David Sun

Hi Chris.

Huiping Yan

A great morning.

Chris Woronka – Deutsche Bank

Can we get a maybe a sense on how the first quarter tracks mostly from the RevPAR, maybe any kind of data point you could share with us for April?

Huiping Yan

Yes, the first quarter as we mentioned, it is seasonally low quarter. We came into the quarter with Chinese New Year in February, but January as we had discussed in prior conversations, the World Expo hangover effect certainly impacted slightly to our business. And February was the Chinese New Year, the business tend to have a low-level while however in March, as people returned from the holidays resuming normal business, March activity has picked up. And in April, as we indicated the trend up has been fairly normal in our observation of the day to day operations.

Chris Woronka – Deutsche Bank

Okay, great. And Huiping, could you maybe give us the margin impact on the leased-and-operated hotels from the pre-opening expense. Is it possible to have if you just back that out in each period, what the margins would have been?

Huiping Yan

The pre-opening expense is certainly one of the major margin driver this quarter. It was RMB14.3 million and certainly compared to the previous 2010 first quarter was a significant increase, and that had impacted greatly on our margins. And then the second element is our new hotel dilution, I’d say ramp-up. There are significant number of new hotels and particularly those opened in late fourth quarter in December.

Chris Woronka – Deutsche Bank

Okay, that’s great. And then on acquisitions, I won’t ask you about anything specific but any acquisitions you would look at, I guess how would you prioritize the potential financing options and what kind of leverage levels are you comfortable, it’s again just in acquisitions on general?

Huiping Yan

Sure. From a financing perspective, we have certainly very strong cash position and we are self-funding our growth plan, with any of the assets cash we continuously as part of the corporate activities, look at strategic opportunities. From the specific choices or priority of financing options, we do look at all of the options. However, we consider dilution, consider their financial costs that would be impacting our balance with P&L and also we look at the tax associated costs of different options that are available to us. For example, if it is an external debt, if it’s a convertible bond, what are some of the rating requirements that we would need to be prepared for and then also the competitive rates that we are able to obtain. All of those factors are all taken into considerations.

Chris Woronka – Deutsche Bank

Okay, that’s great. And just finally, I know your mix of future projects, and its little bit more skewed to the franchise projects seeing quite some time, and as we just look forward into the next year and even beyond. Should we assume remaining the franchise is becoming even bigger part of it and maybe become 75%, 80% or some number like that on the total unit growth?

Huiping Yan

From the growth new addition standpoint, we are looking at 45% to 40% of leased-and-operated hotels being new additions, and the balance is the leased – for the franchised. Going forward, certainly the franchised hotels as a proportion of the total portfolio will increase gradually. We potentially were looking at 60% around that range of the total portfolio being franchised business in the near-term about between three to four years.

Chris Woronka – Deutsche Bank

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

Huiping Yan

Thank you, Chris.

Operator

Your next question is coming from the line of Allen Gee with Oppenheimer. You may proceed.

Allen Gee – Oppenheimer

Thank you. Good morning David, Huiping and May.

Huiping Yan

Hi good morning.

David Sun

Good morning.

Allen Gee – Oppenheimer

Hi morning. Regarding that RMB11.5 million of corporate spending on potential strategic opportunities, could you give us little bit more color on the nature, and also will there – will there be any expenses of the same nature that will happen in second quarter and onwards?

Huiping Yan

Sure. Thank you Allen, for you question. We again as mentioned do continue to look at strategic opportunities as part of the corporate M&A activities. And in first quarter of 2011, we did incur legal accounting related expenses regarding a particular opportunity in the marketplace which is quite significant in size, and in 2011 second quarter, we do not expect significant charges in the same nature.

Allen Gee – Oppenheimer

Thank you. And then regarding that sad accident, a fire accident at Jilin hotel, could you give us an update of any potential impact from that? And do you expect to occur more expenses in addition to the RMB1 million you already promised? And also should we expect any regulatory changes because of this?

Huiping Yan

Okay, thanks for the question. The incident definitely saddened us greatly and then we are very sorry that such things happened near our facility and impacting our guests. The initial report coming from the government including the Fire Marshal Department indicating that our – the fire started outside of Home Inns rental area. It started a floor below our guestroom level. And nevertheless the smoke had evaded into our rental space and caused a loss of life. The Fire Marshal’s assessment of our operating system, the first alarm system is that it is fully functional and it activated in time to alert necessary personnel to notify the officials as well as carrying out our procedures of evacuating our guests.

The overall assessment of the situation is that Home Inns is not directly responsible and we are very focused on assisting the government to taking care of the post crisis activity as you have mentioned. We had committed humanitarian fund to the government of RMB1 million in supporting the government’s effort in addressing the families that had sustained losses and injuries.

Our internal fire prevention system and equipment has been reevaluated immediately after the event. It is a system wide cautionary and preventative effort to ensure that we are ready to prevent and to limit any damages that could take place in the future accidents. The incident itself was arsine [ph] and the fugitive has been arrested. And the government are in the stages of completing their final investigation. At this time, the financial side of the impact is based on these two points of consideration.

First of all, we do have insurance coverage that covers personnel debt injuries as well as property damages. However because we are not directly responsible, the assessment of what portion if any that is responsibility of Home Inns will be determined when the government report is issued. And the second point is going forward, we look at our fire prevention systems. So far they are all in compliance. There are improvements however in the procedure, in the coordination with the neighboring tenants for example, however we do not expect significant investment in changing our current compliance system hardware.

And further, we will continue to work with the government in ensuring the safety standards are carried out which overall is still ensuring of various healthy and safe environment for the hotel industry.

Allen Gee – Oppenheimer

Okay, thank you. When do you think the government report will be issued?

Huiping Yan

We have no definitive target date of the reporting issues, but we do believe that the government has been working very diligently in coordinating all aspects necessary in order to come up with an accurate and complete report?

Allen Gee – Oppenheimer

Okay, thank you. Thank you for the color. And switching gears to a little bit, your selling and marketing expenses as a percentage of revenue rose to a higher level than the prior years. So do we expect that to jump sequentially, or what’s the expectation for the full-year? Thank you.

Huiping Yan

Sure, the sales and marketing expense as a percentage of total revenue continued to remain stable around 1% to 1.4%. And with that said, you are correct that on the absolute dollar standpoint, the sales and marketing expenses did improve. And it is mainly driven by two aspects. One is our strengthened customer call center staffing and system implementation, and then the secondly is as we have new hotels that are ramping up, they incur more marketing promotional expenses. Going forward, we expect that to remain flat and not increase significantly.

Allen Gee – Oppenheimer

Great, thank you for taking my questions.

Huiping Yan

Thank you Allen.

Operator

Your next question is coming from the line of Lin He with Morgan Stanley. You may proceed.

Lin He – Morgan Stanley

Hi and good morning David, Huiping, May and Ethan.

David Sun

Hi Lin.

May Wu

Hi Lin.

Huiping Yan

Good morning.

Lin He – Morgan Stanley

A couple of questions, firstly, based on the trend [ph] you have seen so far in the second quarter, do you expect that the RevPAR of your matured hotel, going to trend up in second quarter. Do you think it would achieve a moderate year-over-year increase in second quarter or you’re seeing it’s difficult because of the touch comparison?

David Sun

Yes, I think overall in second quarter, we see the market condition is quite stable compared with last year, but bear in mind last year in start from May 1st we have Shanghai World Expo. So without Shanghai World Expo impact, we believe that the mature hotels in second quarters still can maintain quite what we call, strong performance or we can say flat or slightly improvement compared with year ago.

Lin He – Morgan Stanley

Okay, got it.

David Sun

As except [ph], for the Shanghai World Expo.

Lin He – Morgan Stanley

Sure. Got it, okay. And then second question is regarding the personnel costs. For this quarter, I know there is, on a sequential basis, your personnel costs decreased from Q4 last year. And then if we look at average per room basis, your labor, your cost personnel cost, also decreased quite significantly on a year-to-year basis. Can you please help us better understand the reasons?

Huiping Yan

Sure. We probably need to compare and note subsequently on the per unit level of data. You are correct on an overall dollar amount changes, but from a unit level as we calculate on a per room night sold basis, personnel costs did go up in the low single-digit level. So what we have been doing as we all know the inflation is out there which does impact our personnel costs. The minimum wage requirements significant out there however, it does impact a portion only of our labor cost structure. So there is a moderate increase on the rate front. We do have also implemented productivity driven initiatives starting last year in anticipation of the labor costs pressure going forward and we will continue to manage those pressures. We do not expect personnel costs to increase in the same pace as the inflation would go.

Lin He – Morgan Stanley

Okay, that’s helpful. Lastly on the share-based compensation front, you have been incurring RMB15 million to RMB16 million share-based compensation for the last two quarters. Do you think that level will be maintained in the following quarters?

Huiping Yan

The compensation, share-based compensation expenses is a very much tied to the stock prices. So it is hard for us to anticipate what it needs to be on a more precise level, but certainly looking back in the trend, as compensation pool maintains stable or slightly increasing as people performing well. We do expect a upward increase trend but certainly not going to deviate significantly from the current levels.

Lin He – Morgan Stanley

Okay, that’s great, got it. Thanks for taking my questions. That’s helpful.

Huiping Yan

Thank you, Lin.

Operator

Your next question is coming from the line of Justin Kwok with Goldman Sachs. You may proceed.

Justin Kwok – Goldman Sachs

Hi good morning, thanks for taking my question.

David Sun

Hi Justin.

Huiping Yan

Hello Justin.

Justin Kwok – Goldman Sachs

Hi, I have just two question to you follow-on, the one is do you mind to give us an update on the progress of Yitel, as I think in its result statement, there is not lot of (inaudible) on that front, just so you can update on how the progress has been in terms of the target of opening. Is it still kind of on target to achieve the opening and also for the one which has opened, how the ramp-up is going? That is my first question.

May Wu

Sure, Justin. Thank you for your question. Our Yitel initiative is on target and progressing as we had anticipated. We are still busy preparing for the opening of a few Yitel hotels this year, and we expect the first one to open sometime around the end of the second quarter. So that initiative is on target and we are pleased with the progress, mostly on the product and marketing and program design front.

And we’ll have to see how the performance will be once the new Yitel opens, which is actually the current existing Yitel in Shanghai. The performance is relatively stable and within expectation, there is – in the second – and the first quarter performance was similar to that of last year and in the second quarter and beyond, we do expect a little bit of decrease compared to the Expo period last year, but everything is pretty much as we had expected.

Justin Kwok – Goldman Sachs

Okay, all right, now that’s helpful. And my second question is about your footprint in terms of a number of cities in China. What about a 150 cities with your flags, I just want to get a sense of how you asses your penetration in terms of the total high and also for each of the city if you mind, just refresh a bit of your latest assessment on how many hotels could you target to fit into these cities or in that phrase, how do you asses the penetration in each of them? Thanks.

Huiping Yan

Yes, with regard to the number of cities, we had indicated that at this time, we believe that there are about 200 cities in China represent our target cities and we’re in about 150 of them. Looking at the largest cities in Shanghai and Beijing, those two cities represent a significant portion of China’s GDP, and we believe that will continue to be a significant portion of our business, although we have accelerated our growth in the second and third tier cities. We see Shanghai and Beijing even with 70, 80 hotels, we still see room to grow particularly in the franchise front to overcome the real estate inflation, but in some of the major second tier cities, we believe the opportunity could range from a 20 to 40 hotels in selected cities and at least 10 in some of the lesser sizable second tier cities.

While in third tier cities, in general, we look at least five Home Inns per city, but they are also borderline in third tier cities where we started to see some growth even if the current opportunity stands at two or three, we would still enter these cities in anticipation of future economic growth in those areas.

Justin Kwok – Goldman Sachs

That’s very helpful. Thank you.

Operator

Your next question is coming from the line of Adam Krejcik with ROTH Capital. You may proceed.

Adam Krejcik – ROTH Capital Partners

Yes, hi thanks good morning everyone, thanks for taking my question. I wanted to get a sense first in terms of your guidance for the full-year, I think last call you said, you’re going to open 100 to 105 – 110 leased-and-operated hotels. Any kind of range or breakdown or how those are going to open through the rest of the year here?

David Sun

Yes, we still maintain the guidance, we open – we plan to open 260 to 280 new hotels in this year, that’s including 100 to 110 leased-and-operated hotels and the rest are the franchise-and-managed hotels. For the scheduled opening, we plan to open about 30% our total leased-and-operated hotels in the first half, than the rest in the second half. So that’s the current schedule we plan for.

Adam Krejcik – ROTH Capital Partners

Got it, thank you. And then in terms of thinking about EBITDA margins, about 18.6% adjusted EBITDA margins in Q1. How do you kind of see that ramping up through the rest of the year, and any than any type of guidance range you could give for Q2 or any range you could – bigger picture and you can get for the full-year would be very helpful?

Huiping Yan

As we consider the cost structure of the business, the impact on our margin comes from of course the operating expenses, but the pre-opening expenses as well as the new hotel more cost impact will continue throughout the year as we add more and more new hotels. Second quarter and the third quarter is typically our high season and that is where we are having a preference of opening more new hotels during those quarters.

So as to ramp up better than a seasonally low quarter such as in the first quarter. So with that said, our first quarter EBITDA margin at 18.6% going into second and the third quarter, we will continue to consider the impact of new hotels and the pre-opening expenses which will continue to impact the margins. We do not expect the margin to improve immediately, it will become increasingly lesser burden for us as new hotels mature and contribute more to the top line as well as improving the bottom line. And the seasonality will certainly help in the second and the third quarter on our margins.

Adam Krejcik – ROTH Capital Partners

Okay, and do you still expect around RMB90 million in terms of pre-opening expenses for this year?

Huiping Yan

That’s what we are still expecting to incur.

Adam Krejcik – ROTH Capital Partners

Okay, and then on pricing, I think in March of this time last year, you did a system wide increase in terms of your prices, I know you don’t have any plans for that this year but since you had mentioned doing it on a hotel by hotel basis, in certain areas, has anything like that been implemented yet and if so, any type of feedback or how that’s been received by customers?

Huiping Yan

Sure. You are absolutely correct, that we do not plan a system wide price upward adjustment this year, given the consideration of new hotels coming online. And we are looking at opportunities that is more hotel by hotel basis of assessment, and also seasonal and event driven type of opportunities. We do balance the consideration between new hotels entering into the market that we serve impacting existing hotels on their ADR levels.

We also look at opportunities that present itself, such as few hotels that we do observe opportunities for price actions in the first quarter. We have observed positive or no negative impact from those reasonable price level increases.

Adam Krejcik – ROTH Capital Partners

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

Huiping Yan

Thank you.

Operator

Your next question is coming from the line of Fawne Jiang with Brean Murray. You may proceed.

Fawne Jiang – Brean Murray

Thank you for taking my questions. First question is regarding the ramp-up of your new hotels. You actually opened around 15 hotels in the first quarter, this quarter could you comment on the ramping up of the hotels. It’s fair to assume that these hotels pretty much reached to a matured stage by now?

Huiping Yan

The openings of the fourth quarter 2010 hotels are still in their ramp-up stage in the first quarter, particularly those around 40 or so hotels that opened late in December, they are practically brand new hotels in first quarter. Our normal ramp-up period is between three to six months. So we would say its majority of these hotels are ramping up, however we do want to consider the first quarter low seasonality as I had alluded to earlier, it is more difficult for new hotels to ramp-up in a low season.

We fully expect these hotels to reach their six month and beyond maturities in the second quarter.

Fawne Jiang – Brean Murray

Got you, thanks Huiping. Second question is actually regarding your first quarter openings. It seems like the recent [ph] operating at hotel openings was relatively light. Is any particular reason besides the low season for construction?

Huiping Yan

As you know that the construction is very much seasonally driven, we tend not to incur higher winter construction costs. And also consider that we do have – we did have significant hotels opened in the fourth quarter of 2010. So overall, we do have as of now at March 31, 71 leased-and-operated hotels under construction or already contracted to undergo developments. So there will be significant hotel openings in second quarter relative to the first quarter. And overall, opening schedule is still within our expectations.

Fawne Jiang – Brean Murray

And still, my last question is after regarding your franchised-and-managed hotels. You are planning to open 150 hotels this year. It seems like some of your competitors are at a similar opening schedules, just wondered whether you do see competitions in city regions, while you trying to recruit franchisees, what are the key challenges and what factors that help the franchisees in making decisions to go with Home Inns brand instead of your competitors brand?

Huiping Yan

Sure. The franchised business has been evolving and strengthening. We believe Home Inns franchise programs has its early mover [ph] advantage and it has about two to three years lead time in developing. Our strong pipeline of 107 franchised hotels provided us a significant confidence in opening the 150 to 160 – 170 franchised hotels for the year. Competition is there, however our grand recognition, our overall network effect has provided more attraction to our franchisees. And the management program itself at certain levels differs from some of our competitors in where we focused on our franchisees economic goal in being profitable and being responsible to their overall investment had led to more and more of the franchisees willing to sign up with Home Inns. And we anticipate that to continue on as one of our key competitive advantage.

Fawne Jiang – Brean Murray

Got you, that’s very helpful. And thanks for taking my questions.

Huiping Yan

Thank you, Fawne.

Operator

(Operator Instructions) Your next question is coming from the line of Noah Hudson with Guotai Junan. You may proceed.

Noah Hudson – Guotai Junan

Hi good morning David, Huiping and May. Thank you for taking my call.

David Sun

Good morning.

Huiping Yan

Hi Noah.

Noah Hudson – Guotai Junan

My first, actually both of my questions are little bit kind of minor technical questions. The first was regarding the personnel costs for the franchised-and-managed hotels. I wanted to ask if this cost was reimbursed to the company by the franchised-and-managed hotels or a portion of that cost.

Huiping Yan

Yes. It is fully reimbursed by the franchisees. We have the franchised hotels general managers’ fee including their base pay and also a portion of their bonuses as agreed by the franchisee owners to be reimbursed to us.

Noah Hudson – Guotai Junan

Okay, got it. And my second question was regarding the diluted earnings per share was $0.06, correct? And I guess regarding that it said, it’s based on excluding the foreign exchange gain from convertible notes, and also the gain from the fair value change of the convertible notes. So I wanted to note that if you had the breakdown for those two amounts?

Huiping Yan

Sure, give me one second.

Noah Hudson – Guotai Junan

Sure.

Huiping Yan

Yes, the gain on fair value change of the convertible bonds was 15.1 million. In the calculation of diluted shares in this case, since it is a quarter-by-quarter analysis, we take into consideration the full conversion of both 2007 convertible bonds as well as the 2010 convertible bonds issuance. So hence the denominator of number of shares has increased hence reducing the EPS or current ADS.

Noah Hudson – Guotai Junan

Okay, the denominator for this quarter was I guess RMB81.811 million.

Huiping Yan

Why don’t we take it offline, I will provide you with the full breakdown of the details.

Noah Hudson – Guotai Junan

Okay, thanks. That’s all, thank you.

Operator

Your next question is coming from the line of Hairong Zhang with Miller Tabak. You may proceed.

Hairong Zhang – Miller Tabak

Good morning David, Huiping, May and Ethan.

Huiping Yan

Good morning.

David Sun

Good morning.

Hairong Zhang – Miller Tabak

I have a question regarding pricing in the first quarter, I mean as, Huiping just mentioned that the company was now going to have a system – was now going to implement system wide rate increase, but in this quarter, in the first quarter, we see ADR trending pretty nicely up by like 4%. And as we understand Home Inns is entered into more like low tier cities, but so I just want to get more sense from the management, how do we better understand this 4% rate increase even though we are entering more low tier cities?

Huiping Yan

Sure. As of March 2010 price increases are fairly much intact. So from a year-over-year basis, we have that 4% ADR increases. And the mix of our lower tier cities has been stable. The most entrance into lower tier cities for us took place in 2007 and 2008 timeframe. Right now, we are about 75% or higher percentage located in second tier and below. And we continue to expect this ratio to remain stable. So hence the dilutive impact going into lower tier city has been diminished.

Hairong Zhang – Miller Tabak

Okay, got it. That’s helpful. The second question is regarding the International Horticulture Expo which is to be held in the City of Xian. I am just wondering whether you guys expect any incremental sales from this event and I know obviously this is relatively a small event compared with Shanghai Expo, but I just want to some color from management on this Xian’s event.

Huiping Yan

Sure, it certainly is a significant event, however compared to World Expo its certainly less significant. And it is still in the early stage of the programs and we have not expected significant price movements because of that, however as we indicated we are watching very closely in monitoring all the factors that are in place that will allow us to take price.

Hairong Zhang – Miller Tabak

Got it, thanks.

May Wu

Thank you.

Huiping Yan

Thank you.

Operator

Your next question is coming from the line of Lin He with Morgan Stanley. You may proceed.

Lin He – Morgan Stanley

Hi Huiping, just a follow-up question on the cost for franchised-and-managed GM. Can you remind us once again that, do you assign 100% of GM for your franchise hotels?

Huiping Yan

Yes, we do.

Lin He – Morgan Stanley

Okay, and then, it is Home Inns that decides the base salary and the bonus for those GM right, on an each hotel basis?

Huiping Yan

Absolutely.

Lin He – Morgan Stanley

Okay, and then you charge the same amount for your franchises?

Huiping Yan

Correct. It’s fully reimbursed.

Lin He – Morgan Stanley

Okay, I got it. Thank you.

Huiping Yan

Thank you.

Operator

And with no further questions in queue, I would like to hand the call back now to management for any closing remarks.

Huiping Yan

Thank you for everyone’s interest on Home Inns’. As we are very excited about our development pipeline, it is significantly strengthened compared to few periods ago. And we are excited about reaching our 1,000 hotel target this year as well as expansion on revenue and margins going into later 2012, going into later 2011 and beyond for the near-term, near future. Thank you very much and we look forward to update you in our next meeting.

David Sun

Thank you.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. The call has ended. You may now disconnect. Have a good day.

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Source: Home Inns & Hotels Management's CEO Discusses Q1 2011 Results - Earnings Call Transcript
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