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

Q2 2011 Earnings Call

August 10, 2011 9:00 PM ET

Executives

Ethan Ruan – IR Manager

David Sun – CEO

Huiping Yan – CFO

May Wu – Chief Strategy Officer and CEO, Yitel brand

Analysts

Tinny Lu – Cowan & Company

Ella Ji – Oppenheimer

Billy Ng – Merrill Lynch

Adam Krejcik – Roth Capital Partners

Fawne Jiang – Brean, Murray

Sean Chan – Goldman Sachs

Lin He – Morgan Stanley

Grace Lam – Citi

Operator

Hello, and thank you for standing by for Home Inns’ 2011 Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. After management’s prepared remarks, there will be a question-and-answer session. Today’s conference is being recorded. If you have any objections, you may disconnect at this time.

I’d now like to turn the call over to your host for today’s conference, Ethan Ruan, Home Inns’ 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.

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 of Yitel brand who will be further discussing our performance for the past quarter. 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. 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 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 from the second quarter of 2011. Total revenues for the second quarter increased 12.2% year-over-year to RMB905.2 million. We achieved our revenue target despite delayed revenue contributing by newly opened hotels and then temporary closure of number of classrooms during the quarter due to proactive confrontations of most stringent than customary public safety measures. The underlying operating environment continues to be – continue to be stable which allow our previous opened new hotels to ramp up within (inaudible) and our matured hotels that have been in operation 80 months or more outside of Shanghai delivered year-over-year improvements in both occupancy rate and average day rate.

The 88 new hotels we added this quarter scheduled with another 203 additional hotels under development by the end of the quarter resulted from our strengthened development process, which will enable us to achieve higher growth in 2012 and beyond.

Furthermore, even high pre-opening costs, high mix of new hotels, inflationary pressure and absence of the Shanghai World Expo benefits from last year, our hotel level operating margin remained stable. Our improved effectiveness in managing pricing as well as our cost control and productivity initiatives are producing positive results.

Average daily rate was RMB173 compared to RMB177 second quarter a year ago, occupancy rate was 94% compared with 96.4% in the second quarter of 2010. Shanghai World Expo commenced on May 1, 2010 and brought about 25% to 30% price premium in second quarter last year for our hotels located in Shanghai. This price premium coupled with a high occupancy rate due to the high cover volume in Shanghai during the World Expo. The one-time favorable impact to our overall RevPAR for the second quarter last year was admitted to be RMB9. Excluding this admit onetime benefit, RevPAR was RMB152 in the second quarter of 2010. We achieved RevPAR of RMB163 in the second quarter this year, a slight improvement even with a high mix of new hotels in the portfolio. This largely attributed by – to performance improvement by our major hotels, offsetting new hotels dilutive impact.

There was 607 hotels that had been in operation for at least 18 months during the second quarter of 2011. RevPAR decreased to RMB170 from RMB173 for this same group of hotels in the second quarter of 2010. RevPAR for home being hotels located outside of Shanghai that have been in operation for at least 18 months during the second quarter of 2011 was RMB169 compared to 162 – RMB163 for the same group of hotels in the second quarter of 2010. This favorable comparison was attributable by increased in occupancy rates from 97% to 97.5% and increase in ADR from 164 – RMB163 to RMB169 for this group of hotels.

Our membership program continues to strengthen and provide a stable revenue base and as of June 30, 2011, Home Inns had 4.28 million active non-corporate members representing a 42% increase from last year. Room nights sold to active non-corporate members consistently represent over 50% of total room nights sold.

On the development front, Home Inns opened 28 new leased-and-operated hotel and 60 new franchised-and-managed hotels during the quarter. As of June 30, 2011, Home Inns operated across 164 cities in China with a total of 934 hotels.

In addition, there were another 84 leased-and-operated hotels and 119 franchised-and-managed hotels contracted or under conversion.

Allow me to elaborate our revision of revenue estimates for the whole year. The overall confined environment in China is maturing. The government agencies are taking a more integrated approach to enforce and establish public safety standards through more collaboration and information exchange, particularly with regard to the process of granting business license. More focus is being paid on final inspection of complete construction projects and equipment installations and operations. There is a level of loss efficiency compared to the previous somewhat more parallel licensing process.

During the later second quarter, we start to observe this change and a concluding was not isolated to adjust few of our new newly constructed hotels with pending business license. Our previous revenue guidance for the year was based on the shorter developed circle – development circle than what we have experienced lately. And an average of 32 to 45 days longer waiting time with costs, portion of 2011 revenues reflected in our previous revenue growth guidance to shift in to 2012.

During this change and its (inaudible) business process, Home Inns begun implicating internal initiatives to accelerate development pace to ensure our growth trend for these and future years remained unaffected. Given the overall stable operating environment and our continued effort to gain efficiency and making improvement in development, construction and operations, we are confident that the impact from the change of – change in the compliance environment will be temporary and that the Home Inns business fundamentals and profitability profile we must intact. We remain target to open total of 260 to 280 new hotels with 100 to 110 within our hotels and 150 to 170 franchise-and-managed hotels this year and a similar level of new hotels in the next two or three years but expect much stronger revenue growth as we resume a healthy portfolio mix between new hotels and mature hotels.

Lastly, let me give you a quick update on our proposed acquisitions of Motel 168 as announced in May we have entered into a definitive agreement to acquire 100% ownership interest in Motel 168. This acquisition will create most geographically diverse current (ph) hotels operating in China and consistent with Home Inns strategy of develop the multi brand.

We tend to return and operate, it will established Motel 168 brand and leverage Home Inns proven operational expertise to enhance existing Motel 168 hotel’s performance. As well as to further develop and expand the Motel 168 hotel portfolio.

Importantly we do not expect this transaction to cost any deviation from our existing business development and operation of plans for the Home Inns and whole retail brand. The proposed acquisitions is progressing well with pending regulatory approvals. Meanwhile we continue to work closely with Motel 168 to ensure the timely close for these transactions, which we expect to take place in September or October of this year. I’m personally leading the integration effort and I’m overseeing the integration patterns as well as executing while the transaction is occurred. We are confident that this acquisition will have future or further extent of Home Inns leadership position in the industry and create a long-term value for our shareholders.

With that let me turn the call over to Huiping.

Huiping Yan

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

As I take you through the numbers, please note that I will only speak in RMB terms unless specifically mentioned. For the second quarter of 2011, Home Inns’ total revenue was RMB905.2 million, increasing 12.2% year-over-year. The total revenues from leased-and-operated hotels for the second quarter of 2011 were RMB809.2 million, representing an 8.8% increase year-over-year and a 17.7% increase sequentially.

The year-over-year increase was mainly driven by a greater number of hotels in operation. The sequential increase was largely due to seasonality.

During the second quarter of 2011, Home Inns opened 28 new leased-and-operated hotels and involuntarily closed one leased-and-operated hotel due to municipal CITY planning and rezoning.

Total revenues for franchised-and-managed hotels for the second quarter of 2011 were RMB96 million, representing a 52.1% increase year-over-year and a 38.6% increase sequentially. The year-over-year increase in revenues from franchised-and-managed hotels for the quarter was mainly driven by a larger number of such hotels in operation. The sequential increase was driven by an increase fee-revenue base, driven by seasonality, as well as initial franchise fees from a larger number of new franchised-and-managed hotels opening during the quarter.

We opened 60 new franchised-and-managed hotels during the second quarter of 2011 and we closed one franchised-and-managed hotel agreement – hotel due to change in ownership of the property.

Total operating costs and expenses without share-based compensation expense for the quarter was RMB692.9 million, up 21.5% from the same quarter last year. Total operating costs excluding one-time charges or credits including increased pre-opening expenses were within our expectation.

Total leased-and-operated hotel costs for the second quarter of 2011 were RMB626.9 million or 77.5% of the leased-and-operated hotel revenues. This compared to 69.6% for the same quarter in 2010, and 86.2% for the previous quarter. The year-over-year increase in expense ratio was mainly due to a higher mix of new hotels in ramp up with full cost yet limited revenue contribution. The higher pre-opening costs of RMB26.9 million per hotels under construction. A greater number of hotels opening during the quarter driving higher consumable costs and a smaller revenue base attributable to the absence of the one-time benefit of the Shanghai World Expo. The sequential increase was due to a seasonally smaller revenue base during the first quarter.

Compensation and benefit for general managers of franchised-and-managed hotels for the second quarter was RMB16.3 million or 17% of franchised-and-managed hotel revenues. This compares to that of 16.7% in the same quarter in 2010 and 14.8% in the previous quarter.

Sales and marketing expenses for the second quarter of 2011 normalized for one-time accounting adjustment was RMB12.9 million or 1.4% of total revenues compared with RMB8.6 million or 1.1% of total revenues in the same period of 2010, and RMB10 or 1.3% of total revenue for the previous quarter.

The one-time accounting adjustment was due to a change in accounting estimates applicable to accrual of cost associated with outstanding membership reward points. Prior to the second quarter of 2011, Home Inns did not apply any estimated redemption rate than accruing for reward cost due to limited history in its customer rewards program.

During April of 2011, Home Inns began to apply an estimated redemption rate based on cumulative knowledge of redemption and exploration of the reward point.

General and administrative expenses for the second quarter of 2011 were RMB70.8 million, which include share-based compensation expenses of RMB19.9 million at one-time spending of 4.6 million related to the proposed acquisition of Motel 168.

General and administrative expenses excluding share-based compensation expenses were RMB50.8 million or 5.6 % of total revenues compared with 4.1% of the total revenues in the same period of 2010, and 6.2% in the previous quarter.

The above discussed revenues and costs resulted in an income from operations for the second quarter of 2011 of RMB134.4 million. Income from operations excluding share-based compensation expenses and one-time spending was RMB154.2 million compared to RMB188 million in the same period of 2010 and RMB48.5 million in the previous quarter.

Adjusted EBITDA was RMB242.9 million or 26.8% of total revenues decreased 7.2% year-over-year but increased 8.2% compared to the previous quarter. Adjusted net income attributable to Home Inns shareholders, which excludes any share-based compensation expenses, foreign exchange change losses, gain on (inaudible) convertible bonds, and gain from fair value change of convertible notes was RMB114.5 million for the second quarter of 2011 compared with that of RMB148.4 million from the same period a year ago. Adjusted diluted earnings per ADS were RMB2.48 or $0.38 in U.S. dollars.

During the quarter, the company generated a net operating cash flow of RMB254.3 million compared to RMB280 million in the same quarter 2010. The decrease was mainly driven by aforementioned higher cost relative to overall revenues. Capitalized expenditures for the quarter were RMB243.8 million and related cash paid for capital expenditures during the quarter was RMB133.6 million.

As of June 30, 2011, Home Inns had cash and cash equivalents of RMB2.1 billion. The outstanding balance of convertible bonds issued in 2007 was RMB112.8 million including principals and accrued interest. Outstanding balance for long-term financial liability measured at fair value arose from the convertible notes issued in 2010 December was RMB1.2 billion.

Now we turn to our outlook for the third quarter. We expect total revenues to be in the range of RMB955 million to RMB975 million representing a 9% to 11% year-over-year increase. For the full year considering the shift towards a longer new hotel opening cycle from the previously experienced range of four to six months, we are revising revenue guidance for the full year of 2011 to 15% to 17% from the previous 18% to 20% growth year-over-year.

Given the overall stable operating environment and the company’s ongoing efforts to realize efficiencies and leverage improvements in development, construction and operations, Home Inns is confident that the impact of the compliance environment change will be temporary and that the company’s business thesis and profitability profile remained intact.

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

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Tinny Lu with Cowan & Company. Please proceed.

Tinny Lu – Cowan & Company

Great. Thank you. I have a question regarding your guidance. So I know that typical opening cycle is four to six months, right. And then we believe the new compliance on top of that, can you give us a view as to what the opening cycle right now you have? How many – in terms of – are we having 35 to 40 days on top of that or will be even more.

Huiping Yan

Yeah. The opening cycle previous is we stayed at four to six months, so – but in reality average about four to four-and-a-half months. So currently, we observe that the process is getting longer, so we find it’s about 30 to 45 days on top of four to four-and-a-half months that’s that haven’t reached the pre-opening cycle for now?

David Sun

In other words, the four to six months range is still a range, but we have observed a shift more towards the longer end of six months.

Tinny Lu – Cowan & Company

So my understanding is, if I hear you correct that the compliance is about 30 to 45 days incremental, right?

David Sun

Incremental to our existing experience for to 2.5 months, yes.

Tinny Lu – Cowan & Company

Okay, great. The next question I have regarding the pre-opening cost, so even the additional days you have to go this (inaudible), can you give us a percentage what the pre-opening cost will increase on the hotel basis?

David Sun

Sure. The pre-opening cost is an accounting term first of all and majority of that pre-opening expense is related to the rental expenses. In that sense then the overall cost as we estimated will remain somewhat stable, as you understand that we are – we have a large footprint, the construction that takes place throughout the country varies from project to project. As of our current view, the pre-opening expenses is not going to materially change.

Tinny Lu – Cowan & Company

Okay. So even with the additional 30 or 35 – 30 to 45 days, you don’t think your opening cost won’t increase slightly or...?

David Sun

It will increase slightly, but it will not be a material change given the whole opening cycle is four to six months.

Tinny Lu – Cowan & Company

Okay, great. Thank you. That’s all my questions.

David Sun

Thank you.

Operator

Our next question comes from Ella Ji with Oppenheimer. Please proceed.

Ella Ji – Oppenheimer

Thanks. Good morning. Regarding your guidance, I want to clarify, is it solely because of this longer opening cycle? Are you adjusting any other assumptions that will also lead to this guidance change?

Huiping Yan

This change for guidance is driven by this shift that we have observed. This trend we of course certainly need to prove that to be true in the next quarter or so and based on our current observation particularly related to those hotels that were opening in the last portion of the second quarter, we have seen this trend and we believe it will be in the next half of the year we’ll continue and hence we have adjusted our guidance and that is the main change – main reason for revision.

Ella Ji – Oppenheimer

And you said that maybe temporary, does that mean this 30 to 45 days longer it may return to the average of 4 months to 4.5 months maybe after this second half of the year?

David Sun

I don’t think this is the fact. I think that the process of what we call the compliance will be (inaudible) is more. It’s same as we observed in this quarter. The temporary impact that means the guidance change is because the guidance we provided this year on the base of the new hotel opened in the previous experience, that’s about four months or four and half months. Now, the environment is getting changed. So we are starting to implement a new cycle of the preparing of the new hotels start from second on next year, the hotels open in next year, so it would be temporary guidance..

Huiping Yan

In terms of impact ...

David Sun

Yeah, in terms of impact of the, we call guidance will be temporary.

Huiping Yan

Let me further supplement, to consider the revenue shift it’s not a loss of revenue, it is shifting into the next year and this is solely due to the accounting cut off of year-end reporting. This impact under revenue is going to be cycled through as we go, if we look at the longer term.

Ella Ji – Oppenheimer

Got it. Thanks. And could you give us some details in terms of number of hotels by third quarter and fourth quarter respectively?

Huiping Yan

We have reconfirmed that our overall plan for growth in the year is still 260 to 280 with a 100 or 110 new leased-and-operated opening. And that is not significantly changing, the first half of the year we opened close to 30% of the 100 to 110 targets and in the second year we will open in the third and the fourth quarter fairly evenly spread out. And then also if I may add that we are implementing internal initiatives and processes in managing and improving the efficiency in development cycle so that we will continue to meet this some initially set opening schedule.

Ella Ji – Oppenheimer

Okay. And you mentioned that you closed a number of guest rooms temporarily to do some safety measures, is it a big amount as a percentage of your total rooms and also did you exclude those rooms with your cash related occupancy rates.

Huiping Yan

Sure. The number of closures is really first of all voluntary as they are responsible corporate citizen and given the attention to the public safety, we took this opportunity to work with people that we do business with such as property owners and also some other commercial business that we cooperate within the same property to work together and improve the overall public safety quality within our operations and around our operations. So those closures were temporary as we implement additional measures that are in some cases beyond the requirements of the regulatory government agencies and those closures are a small portion of our total number of rooms and the revenue impact is not material.

Ella Ji – Oppenheimer

Okay.

Huiping Yan

And also some of these rooms and majority of them already been reopened and we are not expecting impact going forward.

Ella Ji – Oppenheimer

Got it. And lastly, could you just comment on the ADR and occupancy rate trend sequentially from 2Q to 3Q. Thanks.

Huiping Yan

I think it’s as previous, recall experience third quarter is always the recall that best quarter of our business. So, I think from the operating channel wise, we believe that channel will be continued.

Huiping Yan

Yeah. And certainly the seasonality will have an impact on our occupancy rate and the ADR has been stable and if you understand we have started managing our pricing more effectively and we will continue to do so and whenever there is an opportunity for us to gain price we will seize that. Occupancy rate as we expect with the mix of new hotels will be certainly impacted, but we don’t expect that to deviate from what we customarily and normally see for third quarter and fourth quarter.

Ella Ji – Oppenheimer

Okay. Thank you very much for taking my question.

Huiping Yan

Thank you, Ella.

Operator

And our next question comes from Billy Ng with Merrill Lynch. Please proceed.

Billy Ng – Merrill Lynch

Hello. Good morning, everyone. Thanks for taking my question. Basically, I just want to follow up on the guidance change, pretty much because now if I understand correctly as because of the extension of the development cycle that at the same time you guys had managed to stick with the original opening schedule, so like there is still around 260 and 280. So like could you tell me at one point we don’t need to change our new opening numbers, but on the other hand, it seems like there will be some delay, it sounds like there will be some delays, and as a result of that the revenue will slip to 212, so like can you explain a little bit more because I still don’t fully understand how should we see this?

May Wu

Hi Billy. This is May. Let me elaborate a little more on this issue. Although we are not changing the overall number of new hotel openings for 2011, the timing of these new hotels opening has shifted 30 to 45 days from our initial plan resulting in the loss of revenue of this delayed opening.

Billy Ng – Merrill Lynch

I see. Go ahead sorry.

May Wu

Recently say this impact will be temporary to us does not mean we expect the regulatory environment will change rather as soon as we saw this change we adjusted our internal process and initiative to further accelerate our development initiative. Therefore, at this time, previously we had comfortably expected that we would have 35 to 40 new hotels opened in the first half with the remaining opening in fourth quarter. However, at this time, as you see particularly on the leased-and-operated side, we only opened less than 30% in the first half leading to lower than expected new hotel revenue.

But, with the internal adjustment and our very positive trend in the development pipeline that we have experienced ever since the beginning of the year, we will still be able to meet our objective to open 260 to 280 hotels including 100 to 110 leased-and-operated hotels. However, some of the hotels that would initially open in the third quarter may flip into the fourth quarter.

With the adjustment internal initiative, we do expect that the impact will be mitigated and neutralized per se starting in 2012. I would also like to remind you that the 16% to 17% revenue increase takes into, if on top of a tremendous year we had last year, from the Shanghai Expo which resulted in additional onetime gains in revenue. So with our current outlook and development plan we will resume a 20% plus growth rate starting in 2012.

Billy Ng – Merrill Lynch

Yeah, I see because fairly quick because the reason I thought like there probably would have some hotel regionally scheduled to open in November or December and I there is some split for extended development time those hotel will slip to 2012. But maybe you will revise your schedule and push some open a bit early (ph), I think that’s my question. But another one I guess I want to ask is, for the current trend we see the margin actually improved quite nicely. I think the current margin is about 27% for the quarter. Can you tell us the outlook for that in the second half with a bit of the openings, pre opening calls slightly different, but on the other hand it seems like the RevPAR being quite strong. So like how should we look at the margin for the second half?

May Wu

Sure. First of all under revenue side we’ve adjusted the guidance as you understand most of the new hotel would come with lower profitability, especially as it ramps up. So in that sense, the shift is not going not materially impact our profitability per say. In fact, some of the hotels will have – some of newer hotels opening with higher burden on the total portfolio would actually go into 2012.

With that said, though, I do want to say that the slight increase in the pre-opening expenses will be absorbed by a better performance by the existing mature hotel group and also we are confident that the hotels that were previously opened, that are in the later stage of ramping up, are performing and will start contributing positively to the total portfolio. The underlying profitability trend is healthy and particularly as we go into 2012, the mix of new hotel versus mature or maturing hotels will be much healthy for us. And as we expect 20% revenue growth on the top line, we’re also expecting significant expansion on the profitability side.

Billy Ng – Merrill Lynch

Thanks. One last question just on the motel 168, I think you gave us some guidance, but what’s the latest in terms of the closing date, is that still around Q4, early Q4 or late Q4, in terms of the closing?

May Wu

With the level of uncertainty, as much our best estimate at this time, it will be in early Q4 to be safe. It’s by and large dependent on when we’re going to get them off antitrust approval, again at this time we do not anticipate any issues with this approval, it’s just a processing time. It could be in late September, it could slip into October, so I would say early Q4 would be a reasonable estimate. I would like to add that we’ve been having very active dialogue with the Motel 168 management and we have – we are actively planning on the integration of the two operations and we’re comfortable that Motel 168 overall operation remains stable this year.

Billy Ng – Merrill Lynch

Thanks.

May Wu

Thank you.

Huiping Yan

Thank you, Billy.

Operator

Our next question comes from Adam Krejcik with Roth Capital Partners. Please proceed.

Adam Krejcik – Roth Capital Partners

Yeah. Hi. Thanks for taking the call. A couple of questions I want to ask, the first just to get your view on how you read the overall health of economy and I guess specifically the travel industry.

And then also just to clarify this lengthy hotel processes is that anything specific to you guys as a result of the unfortunate fire incident or is this kind of industry-wide. And then also on the, you’ve always mentioned the high speed train – railway build out as kind of a long-term macro positive, just wondering any of the kind of the negative news circulating around and also some unfortunate incidents, is that going to have any quantifiable impact on your results here? Thanks.

Huiping Yan

Okay, Adam. Regarding to the underlying operation environment in this stage we still believe it’s quite stable based on what the performance of our total portfolio especially on our existing (inaudible) in performance especially in out of Shanghai that’s due to see a quite stable and also encouraging.

May Wu

And then regarding the some entry process, we don’t believe it is a isolated case just towards the Home Inns, we believe the industry is maturing and the compliance environment is maturing and making progress and becoming more effective in enforcement. And our company’s ability and our experience from operating in the past nine plus years has afforded us quick responses and immediate action in taking initiative to mitigate any of this impact and we do not expect that to be a longer term and permanent material impact to our business.

Adam Krejcik – Roth Capital Partners

Okay. Great. And then one last question; the sales and marketing credit you booked this quarter that was one-time, we shouldn’t see that recur in Q3 to Q4?

Huiping Yan

That’s correct.

Adam Krejcik – Roth Capital Partners

Okay. Thank you very much.

Huiping Yan

Thank you.

Operator

Our next question comes from Fawne Jiang with Brean, Murray. Please proceed.

Fawne Jiang – Brean, Murray

Good morning, David, Huiping and May. First question is actually regarding the Motel 160. I understand deal is still pending; you probably cannot comment on the detail metric. Just wonder how there are doing in the second quarter in Shanghai and as well as outside Shanghai.

David Sun

Yeah, I think it’s may just mentioned before, it’s – because still on a process of the recall for the deal. So we are very close to what we’ll (inaudible) teams as we understand their daily operation is still very stable. Their performance (inaudible) is very similar what at Home Inns were always said in those trends.

Huiping Yan

As we mention that we’re very closely with the Motel 168 management as well as their middle management. We made an concerted effort to communicate our overall integration and strategy, our integration plan, as well as addressing most of the concerns to the folks that are working currently in 168 early on regarding the integration and the acquisition. So from that perspective, we believe the current deal stable operation is attributable to our carefully planning and proactive communication. And we expect to continue through our – up through the closing time.

Fawne Jiang – Brean, Murray

Got it, Thanks Huiping and David.

Huiping Yan

But just one quick comment the Shanghai Hotels is trending very, very similar in terms of the year-over-year comparisons as compared to Home Inns. And for therefore it’s house outside of Shanghai actually they are improving slightly, I think also because of the stable economic environment and in addition some of their outside of Shanghai are still ramping up. So it’s within expectation and we’re pleased with we see.

Fawne Jiang – Brean, Murray

Thanks. Second question; May, can you give us anything more update on regarding the Inntel (inaudible) for the rest of the year?

May Wu

Sure. Actually, we are very excited that we’re going to have the first new Inntel opening soon. This year we expect three new units open and Inntel is impacted by the same factor that the compliance environment that has impacted the overall Home Inns hotel group. So our initial plans to open three to four leased-and-operated Inntel units now looks like it will be three and there would be one in the third quarter and two in the fourth quarter. We are very excited about this upcoming event and we will have more to report on next quarter.

Fawne Jiang – Brean, Murray

Got It. Thanks. Actually my last question is going back to the margin outlook for the third quarter as well as fourth quarter. Understand per-operating cost for third quarter may go up incremental from 2Q given the larger opening schedule. Just wonder besides that is there any other significant factor that’s different from the second quarter for potential two-way on the margin in the third quarter?

Huiping Yan

Currently we do not see any significant events of factors impacting the margin negatively. As a matter of fact, the third quarter being one of the higher season in our total operations, we are fairly excited about the existing performance by our matured hotels. We do also observe the previously opened new hotels ramping up accordingly and that group of hotels will contribute again positively to the total group. So we’re not expecting trending downward, it’s been more of a trending upwards and extending into 2012 after going through the fourth quarter of being a low season.

Fawne Jiang – Brean, Murray

Got it. It’s very helpful. Thank you.

Huiping Yan

Thank you.

Operator

And our next question comes from Sean Chan with Goldman Sachs. Please proceed.

Sean Chan – Goldman Sachs

Thank you. I just noticed that the personnel cost for the second quarter was up about 16% year-on-year, can the management give us some guidance on the salary – latest salary trend right now and is this year-over-year changed be expected also for a full year growth rate as well.

May Wu

Sure. Yes, if you look at year-over-year comparison personal cost as part of the hotel operations cost went up 16.2% and we do look at this measurement on a more granular level i.e., we look at per room mate sole basis and indeed the cost did go up. It is in the low mid single digit range which is what we previously expected. As you know that we do have a cost structure that is not entirely subject to the overall minimum wage hike and wage increases that is taking place in China. In addition Home Inns has implemented early on starting middle of last year in anticipation of this inflationary cost pressure with regards to personnel cost. Those initiatives are taking good effect in producing better productivity and efficiency so hence we are able to continue to manage this part of the cost of our – this part of the cost in manageable range, which is low mid-single digit.

Sean Chan – Goldman Sachs

Okay. Thank you. My next question is regarding on the top revenue line, you have mentioned that it was negatively impacted by the temporarily closure of number of rooms. I just want to know exactly how many rooms actually have been closed during the period, and if you exclude this impact what would be the year-on-year change on the top line revenue?

Huiping Yan

The number of room closure is where sporadic across the entire quarter. As we mentioned earlier the impact on the revenue is very minimal as we take perhaps one or two room off at one time and addressing some of the compliance enhancements that we are putting in. So there is not a calculated total rooms, because it is really a portion of the quarter that is being closed. Again the overall impact is immaterial and those loss or immaterial loss in the revenue is being nicely absorbed by our better performance of the matured hotel group.

Sean Chan – Goldman Sachs

I see. Thanks a lot for your comments.

Huiping Yan

Thank you.

Operator

Our next question comes from the Lin He with Morgan Stanley. Please proceed.

Lin He – Morgan Stanley

Hi. Good morning, everyone.

Huiping Yan

Hello, Lin.

Lin He – Morgan Stanley

Hi. Just a couple of follow-up questions, firstly, a follow-up on the regulatory change, do you see that change, do you expect any change to your CapEx or hotel in order to perhaps complying with the more safety standards.

Huiping Yan

The compliance change relates to a process change. We do not expect that impacting our overall CapEx investment for each of the hotels.

Lin He – Morgan Stanley

Okay. Okay got it. And then does this compliance change applies to both of your leased-and-operated hotels and franchised-and-managed hotel.

Huiping Yan

Yes. It is a compliance environment change and because we keep the same standards in both leased-and-operated and franchised hotels, they are both subject to the regulatory inspection and approvals so they are also – they are both subject to the change.

Lin He – Morgan Stanley

Okay. I see and lastly regarding your sales channel. There are some third party online agencies are talking about, they are getting more and more business from better hotel operators, from Home Inns perspective since you have more new hotels in the mix in recent quarters, does that mean that you probably will increase the yields of third party agencies to sell those rooms.

Huiping Yan

We have not observed increased reliance on third party or on the third party agencies. We implement a very effective localized marketing strategy and effort. It’s very hotel level based and it’s been very effective. In addition our customer base has been very stable and that also helped us in growing our business without the reliance on the third-party membership program as we mentioned earlier is increasing tremendously and that represents over 50% of our total room nights sold and that itself led us to believe our current marketing strategy is sound and we will certainly continue to work with the third-party agencies, but certainly it’s simply a strategic channel versus a significant channel for us to drive further business.

Lin He – Morgan Stanley

Sure, sure. Can you remind me what is the percentage contribution from third-party agencies in this quarter?

Huiping Yan

It’s less than 6%; it’s somewhere around 5% to 6% and has been stable throughout the past.

Lin He – Morgan Stanley

Got it. Got it. That’s helpful. Thanks, Huiping.

Huiping Yan

Thank you.

Operator

Our next question comes from Grace Lam with Citi. Please proceed.

Grace Lam – Citi

Hi. Good morning. Thanks for taking my question.

Huiping Yan

Hello, Grace.

Grace Lam – Citi

A quick follow-up. Hi, hello. Just a quick follow-up on the new hotels opened in third quarter so far. Have we seen any improvement in the like opening period? Is it like back to the normal the lower end of the normal rage or are we still saying like roughly (inaudible) opening?

Huiping Yan

The previous established experience of hotel opening development cycle with four to six months of a range. And as we mentioned earlier, this range is not changing. The opening cycle is shifting longer towards the more of a six months from the previous four, four and a half months.

Grace Lam – Citi

Okay. So similar and just want to ask Huiping for the one-time corporate expense related to the Motel acquisition, how much are you expecting in the second half of this year?

Huiping Yan

As we close the transaction, there will be more M&A – corporate M&A related expenses taking place. So far we have in the first half of the year incurred close to about RMB15 million and of that cost, majority relates to due diligence and also negotiation of the share purchase agreement. The second half of the year upon closing of the transaction, we do believe there will be a number of charges that comes through as we realize the – as we close the transaction.

Grace Lam – Citi

Okay. That – should that be like similar to what we saw in fourth half or do you expect more...?

Huiping Yan

It will be quite substantial and those pertaining to contingence fees of the closing including financing and investment banking related and some of that will be expense and some of that will be accounted for overall acquisition consideration. But upon closing, we’ll lay this out clearly and it will be more substantial than what we had already recognized.

Grace Lam – Citi

Okay, got you. Thank you. And just like one last question on sales and marketing expense, I understand that is that revision looks like one time event, but I am just wondering would like to regularly review your policy and in terms of estimate, should we still assume a stable percentage of selling expense to net revenues or we..

Huiping Yan

The sales and marketing expenses excluding this one-time adjustment has been fairly stable within 1% range of the total revenue. This one-time adjustment is due to a change in accounting estimates where we apply a redemption grade to accrued cost associate with outstanding reward points. These estimates will continually to be monitored as we further analyze program statistics by the membership reward redemption and also exploration, but it’s now going to be a frequent change. It will be looked at on a more annual basis going forward and you shouldn’t be expecting that one-time adjustment frequently.

Grace Lam – Citi

Okay. Thank you very much.

Huiping Yan

Thank you, Grace.

Operator

And our next question comes from (inaudible) with DH Capital. Please proceed.

Unidentified Analyst

Good morning, everyone. Just one question, regarding your full guidance, does it include anything from Motel 8.

Huiping Yan

No currently it does not include Motel 168, as we mentioned the closing is probably going to be sometime in the end of third quarter or beginning of fourth quarter so we do not – we’re not including motel 168 number in our forecast or estimates. We will start consolidating the numbers after the deal closes.

Unidentified Analyst

So another question regarding your full year guidance revision. So, how many hotels do you plan to open and how many did you plan to open, how many plan under your – how many hotel you planned to open right now under the new guidance?

Huiping Yan

Yeah, I think if I understand your question, this is the previous plan of 100 to 110 lease and operated hotels with another 150 to 170 franchised and manage hotels plan is still the target and we remain confident to execute on that plan. The shift in our existing cycle of opening is causing some of hotels that were previously planned, perhaps in early of the quarter into later quarter. So overall, as we implement our initiatives and finding productivity in our construction, in our development cycle, we do not expect a deviation from our current said and previously said opening schedule for the year.

Unidentified Analyst

So, what do you mean, it’s just delayed, but from one quarter to another, but whatever you planned for the full year will be done in this year?

Huiping Yan

That’s our current expectation, yes, correct.

Unidentified Analyst

Okay. Thank you, Huiping. That’s all my questions.

Huiping Yan

Thank you.

Operator

At this time, there are no more questions, I would like hand it back to management.

David Sun

Okay. Thank you for participation in conference and as a management, we want to emphasize that – as we mention about our full year guidance, that’s a temporary. It won’t be give, what I would call the impact of our business fundamental. So we are very confident to – that impact will be changing – the comprising environment will be temporary and the Home Inns business fundamental and the profitability portfolio will be remained intact. And also the development for Home Inns this year and in 2012, and beyond will be maintained very strong. We are looking for 20% plus growth – revenue growth in 2012. So we’re very confident to receive what the deal from Motel 168 is coming to our family. Thank you.

Operator

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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