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

Q3 2011 Earnings Call

November 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

Liping Cai – William Blair

Tinny Lu – Cowan & Company

Ella Ji – Oppenheimer

Adam Krejcik – Roth Capital Partners

Justin Kwok – Goldman Sachs

Fawne Jiang – Brean Murray, Carret & Charge-offs

Kenneth Fong – JP Morgan

Operator

Ladies and gentlemen, thank you for standing by and welcome to the Home Inns’ reports third quarter 2011 financial results call. At this time, all participants are in a listen-only mode. There will be a presentation, followed by a question-and-answer session. (Operator instructions)

I must advice that this conference is being recorded today Friday, November 11, 2011. I’d now like to turn the conference over to your host for today, Mr. Ethan Ruan, IR Manager. Thank you. Please go ahead.

Ethan Ruan

Hello, everyone, and welcome to our earnings conference call. Our third 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 brand. 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 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 third quarter of 2011. We are pleased to report higher than expected revenue results from the third quarter. Total revenue increased 12.3% year-over-year to RMB988 million. this is primarily due to the better than expected performance and continued operational environments from our mature hotels outside of Shanghai.

The overall market perspective remains stable, and we continue to experience consistency in our operational environment, both of which have helped drive strong performance from our expanding base of mature hotels, and enable our new hotels to ramp up within [inaudible]. Further, our operational cost structure remained stable, and our underlying profitability is in line with normalized historical levels.

We added 71 new hotels during the quarter, including 22 new leased-and-operated hotels and 49 franchised-and-managed hotels as of September 30, 2011. Home Inns operates across 174 cities in China, with a total of 1004 hotels. In addition, there was another 82 leased-and-operated hotels, and 120 franchised-and-managed hotels, constructed or under conversion.

We are on track to achieve our 100 to 110 new leased-and-operated hotels opening target for the year, and we expect to exceed our full-year new hotels opening target with more franchised-and-managed hotels opening this year. Our franchised-and-managed hotel programs [ph] with its support systems has matured over the years. The unique franchise business dynamics combined with Home Inns strong brand is attracting more and more qualified franchisees.

Average daily rate was RMB180 compared to RMB180 during the third quarter last year, occupancy rate was 94.1% compared with 96.7% in the third quarter of 2010. RevPAR was RMB169 compared with RMB183 for the same period a year ago. The one-time benefit of the Shanghai World Expo price premium together with the high occupancy rate boosted overall RevPAR by an estimated RMB16 in the third quarter of 2010. Excluding this estimated one-time benefit; RevPAR was RMB167 for the third quarter of 2010. We achieved an overall RevPAR of RMB169 for this quarter, which increased by an estimated 2RMB year-over-year. This is largely attributable to healthy performance improvements by our mature hotels.

There was 626 hotels that had been in operation for at least 18 months during the third quarter of 2011. RevPAR decreased to RMB179 from RMB185 for this same group of hotels in the third quarter of 2010. RevPAR for Home Inns hotels located outside of Shanghai that have been in operation for at least 18 months during the third quarter of 2011 was RMB178 compared to RMB168 for the same group of hotels in the third quarter of 2010. This favorable comparison was attributable to an increase in occupancy rates from 97.5% to 98.7%, as well as an increase in ADR from RMB173 to RMB181 for this group of hotels, indicating a relatively stable operating environment.

Our membership program continues to strengthen. As of September 30, 2011, Home Inns had 4.61 million active non-corporate members representing a 39% increase from 3.31 million as of September 30, 2010. Room nights sold to active non-corporate members consistently representing over 50% of total room nights sold, providing a stable revenue base to our business.

In addition to achieving our 1000 hotel opening during this quarter under our home grown brand of Home Inns and Yitel. We record another historic event in our growth history with the acquisition of Motel 168 with its over 290 hotels volumes on September 30 of this year. Motel 168 established brand and attractive hotel network provide us a valuable launch pad into a new era of growth of the company.

The integration of the Motel 168 is proceeding as planned. The existing business is stabilizing. In the next 12 to 18 months we plan to leverage Home Inns proven operational expertise to improve Motel 168 existing hotels performance by utilizing its profits from the effective sales marketing initiatives and training and develop its people.

On an improvement basis, we will then further develop and ramp up the scale of Motel 168 brand. We are truly excited about long-term prospects of Motel 168 and its contribution to the Home Inns and it is value adding to our shareholders. Home Inns will enter into its 12th year of operation in 2012. We maintain a positive outlook for the future of the Chinese travel industry given stable economic environments, we plan to open not less than 300 new hotels each year in the next two or three years. And we expect strong revenue growth, as well as margin expansion as we resume a healthy portfolio mix between new hotels and mature hotels starting in 2012.

With that let me turn the call over to Huiping, who will walk through the financials.

Huiping Yan

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

For the third quarter of 2011, Home Inns’ total revenue was RMB988 million, increasing 12.3% year-over-year. The total revenues from leased-and-operated hotels for the third quarter of 2011 was RMB882.1 million, representing a 9.6% increase year-over-year and a 9% increase sequentially. The year-over-year and sequential increase were mainly driven by a greater number of hotels in operation. The sequential increase was also due to seasonality.

Total revenue for franchised-and-managed hotels for the third quarter of 2011 was RMB106 million, representing a 41.7% increase year-over-year and a 10.4% increase sequentially. The year-over-year and sequential 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 also helped by an increase fee-revenue base, driven by seasonality.

Total operating costs and expenses for the third quarter of 2011 were RMB827.9 million. Total operating costs and expenses, excluding share-based compensation expenses and acquisition expenses for the quarter increased 23.7% from the same quarter last year to RMB766.3 million, representing 77.6% of total revenue compared with 70.4% for the same quarter a year ago, and 70% for the previous quarter.

Total leased-and-operated hotel costs for the third quarter of 2011 were RMB674.3 million or 76.5% of the leased-and-operated hotel revenues. This compared to 69.3% for the same quarter in 2010, and 77.5% for the previous quarter. The year-over-year increase was due to a higher mix of new hotels in ramp up with full cost yet limited revenue contribution, a higher pre-opening cost of RMB31.2 million for hotels under construction, and absence of the one-time benefit from the Shanghai World Expo. The sequential increase was due to higher revenue base than the first quarter.

Personnel costs of franchised-and-managed hotels for the third quarter of 2011 were RMB225.4 million, including share-based compensation expense of RMB1.7 million, representing 23.9% of franchised-and-managed hotels revenue. this compared to 16% for the same quarter in 2010, and 17% for the previous quarter. The year-over-year and sequential increase in personnel costs of franchised-and-managed hotels as a percentage of franchised-and-managed hotel revenue were mainly due to an significant increase in headcount, as well as increase in accrued performance bonuses for the general managers of the hotels.

Sales and marketing expenses for the third quarter of 2011 were RMB16.1 million, representing 1.6% of total revenues compared with RMB9.9 million or 1.1% of total revenues in the same period of 2010. the year-over-year increase was mainly due to increased marketing programs spending to enhance Home Inns presence online, as well as in mobile domains.

General and administrative expenses for the third quarter of 2011 were RMB112.1 million, which include share-based compensation expenses of RMB16.5 million, and acquisition related spending of RMB41.4 million. General and administrative expenses excluding share-based compensation expenses and acquisition expenses were RMB54.2 million or 5.5% of total revenue compared with 4.5% of total revenue in the same period of 2010, and 5.1% in the previous quarter.

The above discussed revenues and costs resulted in an income from operations for the third quarter of 2011 of RMB98.5 million. Income from operations excluding share-based compensation expenses and acquisition related expenses was RMB160 million compared to an income from operations of RMB208 million in the same period of 2010, and an income from operations of RMB158.8 million in the previous quarter. absence of the one-time benefit from the Shanghai World Expo last year, higher preopening costs for hotels under construction and a higher portfolio mix with new hotels in operation, resulted in an unfavorable comparison in income from operations year-over-year, however, the cost structure remained stable.

Adjusted EBITDA was RMB272.9 million or 27.6% of total revenues decreased 9.4% year-over-year but increased 10.3% from the previous quarter. excluding estimated Expo impact from the third quarter of 2010, adjusted EBITDA increased approximately 16% year-over-year this quarter. Adjusted net income attributable to Home Inns shareholders, which excludes any share-based compensation expenses, foreign exchange losses, gain on fair value change of convertible notes, acquisition expenses, and accrued withholding tax on distributable earnings from previous periods were RMB132 million for the third quarter of 2011 compared with that of RMB150.4 million from the same period a year ago, and RMB119.2 million for the previous quarter. Adjusted diluted earnings per ADS were RMB2.86 or $0.45 in U.S. dollars.

During the quarter, the company generated a net operating cash flow of RMB276.9 million compared to RMB330.5 million in the same quarter of 2010. Capitalized expenditures for the quarter were RMB304 million and the related cash paid for capital expenditures during the quarter was RMB217 million.

As of September 30, 2011, Home Inns had cash and cash equivalents of RMB1.6 billion. The outstanding balance of convertible bonds issued in 2007 was RMB112.9 million including principal and accrued interest. Outstanding balance for long-term financial liability measured at fair value rose from the convertible notes issuance in 2010 December was RMB1 billion.

Now let us move to our outlook for the fourth quarter. We expect total revenues to be in the range of RMB995 million to RMB1.015 billion representing a 25% to 27% year-over-year increase, without taking into account the revenue contribution from Motel 168. We will consolidate Motel 168 financial results during October 1, 2011, and we expect the revenue contribution from Motel 168 to be in the range of RMB255 million to RMB375 million for the fourth quarter of 2011. The consolidated total revenue in the fourth quarter of 2011 is expected to be in the range of RMB1.35 billion to RMB1.39 billion. This forecast reflects our current and preliminary view, which is subject to change.

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

Question-and-Answer Session

Operator

(Operator instructions) Your first question comes from the line of Liping Cai from William Blair. Go ahead please.

Liping Cai – William Blair

Hi, good morning. my question, my first question is regarding your hotel opening in the fourth quarter of next year, and given your guidance that you are on track to achieve this operating hotel opening of 100 to 110, that means you are going to open between 50 to 60 hotels in Q4, and that is a jump from this quarter, from the third quarter, just wonder what was driving that and has the regulatory environment become more favorable for you, and then for next year for your at least 300 new hotel openings, what will be the split between leased-and-operated and franchised hotels?

Huiping Yan

Sure. Thank you for your question Liping. Yes, your observation is correct that we will be opening in 2011 majority of our leased-and-operated in the remainder of the year. the environment, the tightening environment that we referred to in the second quarter earnings call didn’t really change, so what we’re doing is internally adjusting our planning and development rhythm and schedule so that in 2012 our opening

pace will be returning to normal, and we expect to have around 30% to 35% of the leased-and-operated hotel in the first half and the remainder in the second half.

As of the end of the quarter we have 82 leased-and-operated hotels under construction that provides us a good visibility into the 2012 opening schedule. Of the no less than 300 hotels opening in 2012, we are looking at around 100 to 120 leased-and-operated hotels opening.

Liping Cai – William Blair

It is helpful. And then my other question is regarding your Motel consolidation, I wonder starting from Q4 are you going to provide a more complete P&L separately for Motel, and then in terms of Motel’s performance in the third quarter and 2012, how should we think about comparing to Home Inns what will be Motel’s margins and RevPAR in the fourth quarter, and then for 2012 do you still expect Motel’s operation to be more normalized and achieving EBITDA of around $40 million?

Huiping Yan

Yes, firstly, we will be separating the financial results of Motel 168 starting October 1, and it is our intention to track that separately during the integration period, so we are able to see the visibility of its improvement. And in going forward as of the third quarter, Motel 168 generated about RMB1.1 billion of revenue for the first three quarters, and with the guidance we provided for the fourth quarter, RMB255 million to RMB375 million sales, we are looking at around RMB1.5 billion sales for the full year. and that is within our expectation where Motel 168 is currently having fairly stable operation tracking the normal industry performance.

And going forward we are looking at improving Motel 168 current occupancy rate, which is somewhere around 70% to target to reach 75% on a full year basis for 2012. And with 12 to 18 months total integration period, we hope to normalize the operations reaching a reasonable level of EBITDA. And we will certainly provide more detail as we report our full-year results and the fourth-quarter performance of Motel 168.

Liping Cai – William Blair

Okay, thanks Huiping.

Operator

Thank you. The next question comes from the line of Tinny Lu from Cowan & Company. Go ahead please.

Tinny Lu – Cowan & Company

Thank you. Regarding your guidance for the December quarter, can you give us a break down between the leased-and-operated hotel that will include also the Motel 168? Thank you.

Huiping Yan

Typically if we look back to our historical performance, the franchise operations contribute around 10% to 11% of the total revenue for Home Inns. Motel 168 as roughly 50:50 split between its franchised-and-managed and franchised hotels which is tracking similar to Home Inns’ current proportion. So in that sense, the revenue split is quite similar to Home Inns for the fourth quarter.

Tinny Lu – Cowan & Company

Okay. So that will also imply that will apply to the future in 2012 as well?

Huiping Yan

That is our current view. Certainly we need to have more operational results; we will provide more detail to you.

Tinny Lu – Cowan & Company

Okay, and now one more question, sorry, for you to include Motel 168, can you give us the view as to what is the EBITDA margin impact in the December quarter? Thank you.

Huiping Yan

We could refer to the EBITDA in 2009 for the full year for Motel 168. It is around 12%, 13%. And 2010 is an unusual year because Motel 168 has a large portion of hotels concentrated in Shanghai, which benefit quite a bit from Expo. So looking at 2009, and also considering that Motel’s current operation is tracking industry norm, we believe the EBITDA margin for 2011 would be similar to the 2009 levels. And as we improve the sales performance of Motel 168 in 2012, we would hope to stabilize its core structure and achieving similar or perhaps better EBITDA margin. Throughout the integration period, after we normalize the operations of Motel 168 we would expect to see the margin improvements gradually.

Tinny Lu – Cowan & Company

So, when you talk about 12% to 13% you meant is adjusted EBITDA margin, right?

Huiping Yan

That is correct.

Tinny Lu – Cowan & Company

And then if you include this impact to your Home Inns EBITDA margin, so what is the negative impact you think, is it going to be 2 percentage points or 3 percentage points that will impact your overall adjusted EBITDA margin?

Huiping Yan

We will look at it this way, the EBITDA performance of Motel 168 for 2009 is somewhere around 170, and then we are looking at similarly for 2011 with 13%. It will be around RMB200 million, and that RMB200 million compared to Home Inns proportion of EBITDA margin, it will be dilutive, and we haven’t really calculated specific percentage, and I think the numbers are really out there, we could figure out.

Tinny Lu – Cowan & Company

Okay, great. thank you.

Operator

Thank you. The next question comes from the line of Ella Ji from Oppenheimer. Go ahead please.

Ella Ji – Oppenheimer

Thank you. first of all I want to confirm that when you say you plan to open less than 300 hotels each year, does that include new hotels for Motel 168 and [inaudible]?

Huiping Yan

Actually Ella, if I may correct, we will be opening no less than 300 hotels going forward each year for maybe 2 to 3 years. It does not include Motel 168 opening schedule. For 2012 specifically, we will be first of course stabilize and improve the performance. We will be opening for new project signing in the second quarter for Motel 168’s project, so roughly we would expect somewhere between 25 to 30 new hotels that may come online towards the end of 2012, or maybe beginning of 2013. And that would probably include around 5 leased-and-operated hotels.

Ella Ji – Oppenheimer

Got it, and will you have a separate team for Motel 168’s new projects development, or will you share it with Home Inns existing one?

Huiping Yan

We currently plan to have separate development teams working in the field because the market overlap is different from Home Inns somewhat, and also the product is somewhat different, the property requirement is also differing slightly from Home Inns. However, at the overall group level, we will coordinate the development effort and also looking at various opportunities for selection between the various brands that we have, including Motel 168 and Yitel, as well as Home Inns.

Ella Ji – Oppenheimer

Okay, and then just wanted to follow up along a prior question regarding your EBITDA margin, can you clarify, I didn’t really fully get it what is your expectation for 2012 EBITDA margin if you include the dilutions from Motel 168, do you expect this will still be improvement or decline year-over-year?

Huiping Yan

Motel 168 EBITDA margin is standalone lower than Home Inns currently, and Home Inns normalized margin is looking at somewhere around 23%, 24%. And that would mean that Motel 168 13% will be dilutive to us. And then the other aspect that we talked about is looking at the scale of Motel 168, it generates somewhere around RMB200 million EBITDA on a full year basis for estimated 2011, and that would also look towards Home Inns EBITDA margins that will be proportionally dilutive.

Ella Ji – Oppenheimer

Got it. So, just to clarify, the dilution from Motel 168 probably would exceed you know, the normal EBITDA margin increase that you would get from existing Home Inns hotels in 2012, can I say that?

May Wu

This is May. I just want to add to what Huiping has explained, as we had mentioned Motel 168 has a substantially lower EBITDA margin than Home Inns, which is also where we see the potential opportunity is. However, it will take time for us to bring that up. We had always said that we expect a 12 month to 18 month period, whereas we will consider integration and improve the performance, but even after that we do not expect Motel 168 to necessarily reach the level of EBITDA margins for Home Inns. However, all that has been taken into account when we evaluated the acquisition.

So for 2012 – let us take 2012 for an example, we will be giving more detailed guidance once we complete our full-year planning, which we always do when we record our full year end results. But just directionally, we expect Home Inns standalone EBITDA margins to be fairly stable in 2012 compared to this year. While Motel 168 will be starting from 12% to 13% type of EBITDA margin, upon which we will improve, but at this point, I think it is difficult for us to fully commit to exactly how many basis point we will be able to improve through 2012, although we are more confident about after 12 to 18 months, where we will be able to bring that to.

So in a sense of dilutive, the EBITDA total amount will certainly be additive, but the combined EBITDA margin will certainly be affected negatively by consolidating Motel 168 results. Did this make sense?

Ella Ji – Oppenheimer

Yes, got it. Thank you. that is very helpful. My next question is regarding your ADR increase in 2012, given that the inflation rate probably will taper off in next year, how should we expect your ADR increase as comparison to this year’s?

Huiping Yan

The ADR increases generally we are looking at 3% to 5% tracking the CPR [ph], and we are based on several economic assessments out there, we expect the current CPR to drop in 2012 from current level. So with that consideration in mind and also being a budget total, our customers are very price conscious, we will be very prudent in raising prices across the network. So we will be looking at still from today’s vantage point around the same level of CPR or perhaps stable across the network.

Ella Ji – Oppenheimer

Got it, and last question is regarding your franchised-and-managed hotels managers’ compensation, and there is an up-tick in that and you have mentioned that is increase in accrued bonus, so is it like because of the overall, the compensation for F&M mangers on the industry is on the rise, or is it just that you company specifically want to raise salaries to attract better quality people?

Huiping Yan

First of all, the compensation or personnel costs for franchise general managers are reimbursed by our franchisees. And the increases in the rates were driven one by increased number of franchised hotels requiring more number of general managers in managing that portfolio. And then two, the increase in the rate in the accrued bonuses is related to the performance of the Hotel, as well as an agreement with the franchisees to where people should be properly rewarded.

And we don’t believe this is an industry initiative, our base salary for our franchise hotel general managers are tracking similar to the market level.

Operator

Thank you. Your next question comes from the line of Adam Krejcik from Roth Capital. Go ahead please.

Adam Krejcik – Roth Capital Partners

Yes, hi, good morning. a couple of questions from me, first, just going back again to Motel 168 margin, I am just curious given the what is going to be a higher daily rate for these hotels, and what I thought was more attractive on a stand-alone basis since a lot of them were negotiated a number of years ago, why is the margin profile if we look at it on an individual basis, half of that of what Home Inns is?

Huiping Yan

This is really related to its hotel sizes, if you look at its occupancy rate, it is significantly lower than Home Inns. We’re looking at full year basis 2011, around 70%, and that would mean there is a significant portion of the fixed cost that were not covered by revenue. so that compared to Home Inns 90%, 95% occupancy rate is structurally different. And that is also why we find opportunity to improve upon its occupancy rate. For 2012, as I mentioned earlier we are targeting 75% or perhaps more occupancy rate from current 70%.

And with that we should improve – help improve the margins. Now with that said, I would caution that Motel 168 in its entirety on the headquarter level it is very thinly staffed, or thinly structured. It was not a public company, and also does not have a very strong meaningful presence of a development team. So all of these would require us to add to the cost structure on a total company basis. So with all that together, we believe in the near term during our integration, early part of the integration we would see gradual improvements in the EBITDA margins and not significantly, but as we normalize the business, improving the performance we hope to improve its margin meaningfully.

Adam Krejcik – Roth Capital Partners

Okay, and my second question is on your franchise and managed outlook, it appears that you guys and I guess an industry trend is moving towards more aggressive expansion on the managed side of things, the franchising. I'm just wondering do you see any risk to this type of shift and then specific to your expansion what typically are you targeting for these franchised-and-managed hotels, is it existing cities and is it any specific region or is it fairly broad-based across China? Thank you.

Huiping Yan

The industry is demonstrating a shift towards franchised-and-managed business model, and we believe it is reasonable for this business model to be recognized by the business community, especially the prospective franchisees who are largely business owners that have generated excess cash and wanting to invest in the good return business. And for Home Inns specifically we do see the risks of going into it too early and without a sound and stable supportive system, an established program for franchise business and we have started building this program in 4 or 5 years ago which provided us lots of experience and know how in managing the culture, managing the risk management of this business model.

And also in addition we have a commonly practiced strategy of using leased-and-operated hotels in penetrating into new markets as opposed to and bringing in franchise business once we established operational know-how in the local market, and we will continue to do that. So to specifically answer your question, the new franchise businesses will be more towards the established markets where we already have presence, or we would be established presence before introducing the franchise business we would have lease and operated operations existing.

Operator

Thank you. Your next question comes from the line of Justin Kwok from Goldman Sachs. Go ahead please.

Justin Kwok – Goldman Sachs

Good morning. Thanks for taking my question. The first one again on Motel, but I just want to ask that your first point on how in order to improve the occupancy one thing you mentioned is to revitalize the assets. I just want to get a sense on the Capex, just remind us how much you want to spend to revitalize the asset, what you are going to do, and are you going to capitalize it, expense it or how you're going to treat these additional costs, and also would you be expecting to book further M&A related charges or expenses in this quarter or next quarter in the future. This is my first question.

Huiping Yan

Thank you Justin. The repair and maintenance program of Motel 168 is done on a cycle basis, in average four to five years that they will invest and then at the time of acquisition we just so happened to fall in to latter cycle, latter part of the cycle. So we looked at the properties, some of them requires additional investment to bring it up to the quality standard that we believe is needed. So we in the integration pro forma forecast we’ve budgeted around $10 million to $15 million USD in improving and revitalizing the properties and we will be conducting that activity in the next 9 to 12 months.

The Capex majority of them would be capitalized, and then also there is a portion based on the accounting rules will be charged to P&L immediately. The M&A charges, we have recorded RMB41.4 million in this quarter, in the third quarter. The expenses in the fourth quarter would be meaningfully less, would be significantly less. There will be some additional follow-on work related to the legal side of the acquisition. So majority or bulk of the charges already went through our P&L.

Justin Kwok – Goldman Sachs

Great. That's very clear. And my second question is actually on the whole company’s brand portfolio in terms of your positioning and the way you won the customers, or just look at all these different hotels now. You have Yitel, you have Home Inns and for Motel, actually you have 168 and 268. So going forward how are you going to position them in terms of pricing, in terms of customer mix. And also in terms of your longer-term outlook on the size of the company, how many hotels would be in terms of percentage will be in each of these individual brand that will be some helpful guidance. Thanks.

May Wu

Hi Justin. This is May. We still look at our company as a provider of lodging services to the mass market in China, and we think that market as we started in economy segment, we now believe that there is potential for us to get into the midscale segment, whereas the you know, some of the business, domestic business travelers has elevated their economic status, as well as their needs for a hotel product.

So Yitel is designed to satisfy and to cater to this segment of the customers, but overall I think you can still categorize our core market to be domestic business and individual leisure travelers. While Motel 168 and Home Inns brand will both fall into the economy hotel segment, we will emphasize a little more on the home feel and warm feel of the Home Inns product, while emphasize a little more on the trendy and fashionable product aspect of Motel 168.

Although we will start with similar price point for Motel 168 and Home Inns we believe that as we enhance the maintenance and product refinement and service streamlining for the Motel 168 product, over the next one to two years, we will be able to bring up the Motel 168 product's price point to be 10% to 15% above the core Home Inns product. While Yitel intended pricing will be 50% to 80% above the economy hotel products in general.

Justin Kwok – Goldman Sachs

I see. That's very helpful and any best guess on the medium say 3 to 5 years term in terms of the size of the portfolio split among these say three major products.

May Wu

Sure. With Home Inns core product we will be adding 300 or more of Home Inns per year in the foreseeable future in the next several years. Motel 168 we will start to ramp up the development team, and expect to have some new opening by the end of 2012, while 2013 will gradually ramp up, but starting from 2014 we also expect for Motel 168 to reach a pace of 150 to 200 hotels per year starting from 2014. While Yitel we expect to reach 40 to 50 Yitel in the next three to four years.

Justin Kwok – Goldman Sachs

Okay. That's very helpful. Thank you.

Operator

Thank you. Your next question comes from the line of Fawne Jiang from Brean, Murray. Go ahead please.

Fawne Jiang – Brean Murray, Carret & Co

Good morning David, Huiping, and May, first question regarding as a follow up on Motel 168. I think as of third-quarter you have around 295 stores. You mentioned that you're not going to open, probably not going to open new stores from most of the year of 2012. Just wonder, are you going to close down some of that or convert that into other purpose, also with that is there any implied revenue trend for 2012 versus 2011.

Huiping Yan

Hi Fawne. Thank you for your question. Motel 168 we acquired 295 locations. We currently have no plans of closing down any of them and starting in late 2012 or beginning 2013, we would be opening around 30 new properties or new locations. Currently in the pipeline there are roughly around 20 or so from the franchised business model. There is not much on the lease and operated side.

Fawne Jiang – Brean Murray, Carret & Co

Got it. Thanks Huiping. Next question regarding the EBIDTA margin for the business, you mentioned that the average EBIDTA margin for 2011 is in the ballpark number of 13%. I think EBIDTA margin is really fluctuating from quarter-to-quarter depending on the seasonality. Just wonder you know, like what would be the, you know, real estate I think estimate for fourth-quarter.

Huiping Yan

We have 13% on a full-year basis and as you understand fourth-quarter and the first quarter are the slower season, which EBIDTA margin would be depressed as opposed to the second and the third quarter.

Fawne Jiang – Brean Murray, Carret & Co

So we should expect a significant – well it should be like lower, average, good margin…

Huiping Yan

Yes, it should be – yes the full-year is estimated at above 13 and the fourth quarter would be somewhere, it will be worse than the 13.

Fawne Jiang – Brean Murray, Carret & Co

Got it. My last question regarding your Yitel business. And you said you opened one new store in the third quarter. Just wonder what's the update on initial ramping up, also what's your plan for next year's on that brand in terms of the store opening schedule.

Huiping Yan

So, we were very excited to have seen the first new format Yitel opening in Taiwan in September of this year. Currently, the ramp up is as expected meaning that it has some nice trends in September and October, although we are entering the slower season and the colder months in Northern China for November and December, but the performance is on target and as expected.

There will be one or two more Yitel opening in the fourth quarter, most likely two, and we expect next year to see anywhere between 4 units to 6 units of new Yitel opening and we hope that some of that will be franchised as we are actively recruiting and developing a franchise community for the new Yitel product.

Fawne Jiang – Brean Murray, Carret & Co

Got it. To follow up on that May, is the conversion period for Yitel approximate or similar to your Home Inns brand or it will be longer.

May Wu

Yitel conversion period will be substantially longer than Home Inns given the size and complexity, as well as the quality requirement of the conversion. We are currently looking at around a 10 month type of preparation period, and a 6 to 9 month type of ramp up period after hotel opening.

Fawne Jiang – Brean Murray, Carret & Co

Got it. That's very helpful. Thank you very much.

Operator

Thank you. Your next question comes from the line of Kenneth Fong from JP Morgan. Go ahead please.

Kenneth Fong – JP Morgan

Hi, good morning. Thanks for taking my question. Also on Motel 168 I just want to clarify on the margin front. I remember that during the acquisition, you kind of discussed that EBIDTA for 2010 were around $16 million and [inaudible] Shanghai Expo we are around less $40 million. That will be translated into approximately to RMB260 million, again showed RMB1.5 billion [ph] will be approximately 17% kind of EBIDTA margin versus you have guided like 2009 margin of 13%. I just want to see what is the difference here between the two?

Huiping Yan

Sure. Thank you Kenneth. We looked at the performances of our 2011 and looked at Motel 168’s operation, and then we also tracked back to 2009’s performance and it appeared to us that Expo impact is actually greater than what we previously estimated. As you understand that there is really not a precise mechanism to track the Expo performances. So looking at the actual occupancy rate ADRs and the level of operation being normal compared to 2009, we recalculated and re-estimated the Expo impact is almost half of the $16 million. So in that sense the $16 million in total of 2010 EBIDTA half of which is contributed because of Expo.

Kenneth Fong – JP Morgan

Got you. And on – so how much room do you think on the margin funds there will be like significant improvement in the near term, like there are some cause or any area that can immediately see improvement and if we place some low hanging fruits, we put that in how big should we improve on the margin front?

Huiping Yan

The low hanging fruit is really in the improvements in the revenue side of the business, not necessarily on the cost side as I alluded to earlier briefly that we possibly would look at improving the infrastructure of Motel 168 and bringing it up from a private company to public company. The improvements on the revenue side, specifically looking at on a full-year basis for 2012, we would improve its occupancy rate from the current full-year basis of 70% to somewhere around 75% or maybe more, and that is where we are focusing our resources on.

Kenneth Fong – JP Morgan

If we can improve the occupancy say by like 5 percentage points, how will it translate into the EBIDTA margin improvement? Would it be like 1% to 2% or --

Huiping Yan

It is too early for us to provide that estimate and we are directionally looking at a healthy and reasonable increase together with the revenue increase, but it's really difficult for us to pinpoint a number as of now.

Kenneth Fong – JP Morgan

Okay, and then --

Huiping Yan

I think, I also want to add that the Expo impact is, you know, whatever happened happened. It's difficult to 100% accurately assess what the Expo impact is. While 2011 may be considered a normal year, on the other hand, we do see that a little bit of slowdown of the hotels in Shanghai as a kind of post-Expo fatigue. So hence we think that although we had initially, when we initially assessed the acquisition we had hoped that Shanghai would be in a stable or slightly improving compared to 2009 level, but that's not what we're seeing at both Motel 168, as well as Home Inns properties.

I think that's also what you probably have seen from other economy hotel operators. Therefore you know, whether Expo impact last year versus this year is that $20 million, $25 million, you know, we don't think we have 100% accurate number we can put on. So we can at this stage all we can say is that looking at 2009, looking at 2011 you know, we believe that 2012 will be a year that will improve upon that, and of course, right now we're saying that at least a 10% type of improvement based on current performance but given that Motel 168’s portfolio is highly geared towards existing portfolio, it's highly geared towards Shanghai.

You know, how well Shanghai performs you know, will substantially impact the performance of the entire portfolio at this stage, although we will be looking to diversify the portfolio once we start new development. So I think at this point we're just giving some directional indication of where we will bring the business to but we think when we report our full year number and give 2012 guidance, we will be able to provide you with a more clear roadmap in terms of what 2012 and beyond will look like.

Operator

Ladies and gentlemen, that brings us to the end of the question-and-answer session. I will hand back to our presenters for closing remarks.

Huiping Yan

Thank you again everyone for your interest and we're very excited about the integration of Motel 168 and our scheduled planned approach to stabilize the business, improve upon its performances and infrastructure, as well as future development. It is going to be a significant value add to the total group, as well as a value add to our shareholders, and we look forward to report back to you when we report our fourth quarter and full year results. Thank you again.

Operator

Ladies and gentlemen that does conclude our conference for today. Thank you for your attendance. You may all now disconnect.

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