Executives
Angela Li - IR
David Sun - CEO
May Wu - CFO
Analysts
Robin Roberts - Jayhawk Management
David Katz - CIBC World Markets
Chris Woronka - Deutsche Bank
Bo Hong - Horizon Capital
Marisa Ho - Credit Suisse
Keith Yung - Merrill Lynch
Chris See - BMP Securities
Daniel Su - Citigroup
TRANSCRIPT SPONSOR |
Home Inns & Hotels Management Inc. (HMIN) Q1 2007 Earnings Call May 21, 2007 9:00 PM ET
Operator
Good evening and thank you for standing by for the Homes Inn First Quarter and Full Year 2006 Earnings 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 and if you have any objections, you may disconnect at this time.
I would now like to turn the meeting over to your host for today's conference, Angela Li, Home Inns Investor Relations Manager. Please proceed.
Angela Li
Thank you, Wendi. Hello, everyone, and welcome to Home Inns first quarter, 2007 earnings conference call. Our first quarter earnings results were released earlier today and are available on the company's website as well as on Newswire Services.
Today, you will hear from David Sun, our Chief Executive Officer and May Wu, our Chief Financial Officer. After their remarks, David and May will be available to answer your questions.
To start, please note that the discussion today will include forward-looking statements made under the Safe Harbor Provision of the US Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties, as such our results maybe materially different from the views expressed today.
A number of potential risks and uncertainties are outlined in our public filings with SEC. Home Inns does not undertake any obligation to update any forward-looking statement, 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.
| TRANSCRIPT SPONSOR
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David Sun
Hi everyone, and thank you for joining us to discuss Home Inns' first quarter results of 2007. With me here today is May Wu, our Chief Financial Officer. We achieved strong first quarter revenue of over RMB183 million, representing a 65.5% increase year-over-year. This is above the high-end of previous estimate.
Our income from operations, excluding share-based compensation, increased 34.7%, compared with that of 2006. And our EBITDA excluding the impact of foreign exchange losses, share-based compensation and a one-time deferred tax charge increased 56.6% year-over-year.
We continue to rapidly expand our nationwide network of hotels, while maintaining high occupancy and profitability. During the quarter we opened three new leased-and-operated hotels and eight franchised-and-managed hotels. This expands our hotel chain at end of the quarter to 145 hotels in operation. There are an additional 36 lease-and-operating hotels, and 12 franchise-and-managed hotels under development, covering 53 cities.
As many of you know, we typically open majority of our hotels in the third and fourth quarter and we are on track to achieve our revenue growth of 60% to 70% for the year.
We are the leader in China economy hotel industry, in terms of geographic coverage, total revenue; total number of hotels opened, and total hotel room. We continue to see high demand for our products as evidenced by the high occupancy at our hotels, which was 86% for the first quarter of 2007, even with decreased business travel activity during the Chinese New Year.
The demand for the economy hotels in China is large and growing. China's lodging market is still highly fragmented. We continue to see opportunities to grow with the market as well as taking the market share.
In 2005, the top 10 brands accounted for about 13% of our total sales in China. While in the US this number is about 60%.
For us, a high quality and a consistent product across our hotel chain, is just as important, as an aggressive expansion strategy. Our efficient and integrated operational infrastructure and information system, allows us to manage our hotel Network effectively and give us the ability to expand even further.
The high quality and consistent products have led to Home Inns strong brand recognition and increasing member network.
At end of the quarter, we had more than 268,000 active members who contributed to more than 48% of our room nights. At end of last year, the active members were 200,000 and they contributed to 44% of room nights.
As one of the leading economy hotel chains in China, with strong brand recognition, we believe that by continuing to target right customer segments and offering a consistent and quality product in convenient locations at a reasonable price, we will benefit from the opportunities before us for many years ahead.
Now I will turn call over to May Wu, our CFO, to walk you through the financials.
May Wu
Thank you, David, and hello to everyone on the call. As David mentioned earlier, we again achieved very strong revenue growth, while maintaining profitability. I would like to walk you through the major contributors to our results and some financial highlights.
Please note that certain figures I would talk about are non-GAAP, including EBITDA and some measures that are given excluding stock based compensation expenses. You can find a reconciliation of these figures in the financial tables at the end of our press release. All figures that are mentioned will be in Remnibi unless I say otherwise.
We completed the quarter with total revenue of RMB183.1 million, representing growth of 65.5% year-over-year. Total revenue from leased-and-operated hotels for the first quarter of 2007 was RMB174.6 million, representing a 60.7% increase year-over-year. The company opened three new leased-and-operated hotels during the quarter.
Total revenues from franchised-and-managed hotels for the first quarter of 2007 were RMB8.5 million, representing a 327% increase year-over-year. We opened eight new franchised-and-managed hotels during the quarter and one-time franchise fees were recognized as these hotels opened.
Franchised-and-managed hotels represented 33% of total hotel count at the end of this quarter, compared with 20% at the same time last year, and 30% last quarter. Although, our strategy remains to increase franchise mix to 35% range in the intermediary term, we expect the mix to increase slowly in the next few quarters, based on our current pipeline, which means our leased-and-operated hotel will grow faster.
Occupancy rate for the entire Home Inns hotel chain was 86% in the first quarter of 2007, compared with 90% in the same period in 2006 and 90% in the previous quarter. RevPAR in the first quarter of 2007 was RMB151, compared with RevPAR of RMB157 in the same period in 2006 and RMB165 in the previous quarter.
The decrease in occupancy rates and RevPAR from the fourth quarter of 2006 was primarily due to the impact of the Chinese New Year, which typically results in decreased business travel activity.
Compared to the first quarter of 2006, we entered into more new cities and second tier cities in late 2006 and the first quarter of 2007. Hotels in these cities usually take slightly longer time to ramp up.
Total operating expenses for the quarter was RMB156.7 million. Total operating expenses excluding share-based compensation expenses were RMB154.9 million or 84.6% of total revenue. That is compared to 82.8% in the same period of 2006 and 81.4% in the previous quarter.
Let me discuss the contributing factors that caused this fluctuation. There are three components of our operating expenses; first, leased-and-operated hotel costs. For the first quarter, leased represented 78% of leased-and-operated hotel revenue, compared to 76.5% in the year ago period and 74.2% last quarter. The percentage increase from last quarter was primarily due to the impact of Chinese New Year. And the percentage increase year-over-year was due to the lower occupancy rate discussed previously as there were fixed costs associated with hotel operation and overall costs does not decrease as much as occupancy.
In addition, there were high numbers of new leased-and-operated hotels under construction and as incurring pre-opening expenses.
Second, selling and marketing expenses; for the first quarter selling and marketing expenses accounted for about 2.2% of total revenue compared to 1.5% in the year ago periods and 2.4% last quarter. We slightly increased our advertising activities, starting from the third quarter of last year. As we believe these activities will help broaden our brand awareness and we continue to invest in these.
Spending on such activities was minimal in the first half of 2006. As a result, our selling and marketing expenses as a percentage of total revenue increased year-over-year. But our overall selling and marketing expenses remained relatively low.
Third, general and administrative expenses; for the first quarter G&A expenses accounted for 8.9% of total revenue, compared to 6.5% in the same period of 2006 and 8.8% in the previous quarter. Excluding share-based compensation expenses, G&A represented 8% of total revenue in the first quarter compared to 6.2% in the same period last year and 8% in the previous quarter. The year-over-year increase was due to the additional expenses we incurred as a public company.
Income from operations for the quarter was RMB15.9 million. Income from operations excluding share-based compensation and with RMB17.6 million or 9.6% of total revenue compared to 11.8% in the same period 2006 and 12.1% in the previous quarter. The decrease in operating margin was primarily due to; number one, the higher leased-and-operated hotel cost as a percentage of leased-and-operated hotel revenue that was discussed previously. It was partially offset by increased mix of franchise revenue which has no direct cost.
The decrease in operating margins was also caused by increased sales and marketing expenses and general and administrative expenses as a public company as discussed just now.
EBITDA for the quarter was RMB25.8 million excluding FOREX loss of RMB6.1 million and share-based compensation of RMB1.7 million, EBITDA would be RMB33.7 million, representing an increase of 56.6% from year ago period, though a decrease 3.7% from the previous quarter due to the negative impact of the Chinese New Year.
Net income for the quarter was RMB3 million excluding non-recurring charge for the re-measurement of net deferred tax assets of RMB6.1 million, FOREX exchange loss of RMB6.1 million and share-based compensation of RMB1.7 million, net income would be RMB16.9 million, which is up a 104.4% year-over-year.
Let me explain the nature of the non-recurring charge for net deferred tax asset re-measurement. On March 16, 2007, the PRC National People's Congress passed the China Corporate Income Tax Law, which will reduce income tax rate for most enterprises from 33% to 25%, effective January 1, 2008. This is expected to lower our effective tax rate.
As a result net deferred tax assets, which represent temporary differences that are expected to be recovered or settled in the future, are expected to be reduced because of the re-measurement at lower tax rate. We assessed this impact and recorded in the current quarter a non-recurring charge of RMB6.1 million which represents a total re-measurement impact for all net deferred tax assets recognized before January 1, 2007.
Basic and diluted earnings per share amounted to RMB0.05 or US$0.01 and RMB0.04 and US$0.01, respectively. And basic and diluted earnings per ADS were RMB0.09 or US$0.01 and RMB0.09 and US$0.01, respectively. Excluding the non-recurring charge for re-measurement of net deferred tax assets, FOREX loss and share-based compensation diluted earnings per share would be RMB0.25 or US$0.03 and diluted earnings per ADS will be RMB0.49 or US$0.06.
Net operating cash flow for the first quarter of 2007 was RMB23.4 million. Capital expenditures for the quarter were RMB55.3 million.
As of March 31, 2007, Home Inns had cash and cash equivalents of RMB674.2 million. Home Inns completed an additional offering in May 2007, receiving net proceeds of approximately US$48.1 million from the offering.
Now let me provide you with our guidance for the second quarter of 2007.
We expect our total revenues in the second quarter of 2007 to be in the range from RMB228 million or US$29.5 million to RMB238 million or US$30.8 million. I want to emphasize that this forecast reflects Home Inns' current and preliminary view which is subject to change.
Now let me turn the call back to David for his closing remarks.
David Sun
Thank you May. Once again thank you for your participation in our first quarter conference call. Now we will be happy to take any of your questions.
Question-and-Answer Session
Operator
(Operator Instructions). Your first question comes from the line of Robin Roberts with Jayhawk Management. Please proceed.
Robin Roberts - Jayhawk Management
Hi, will you help me understand the impact of entering the second-tier cities, in terms of exact magnitude on your EBITDA margins, RevPAR and occupancy rate. I understand that as you first enter into new city it takes times to ramp-up the occupancy rate, operations etcetera. So I am wondering when you look at your historical numbers after you second-tier city is fully ramped-up. What is the RevPAR rate for a second-tier city hotel as compared to Beijing and Shanghai and also what is the occupancy rate in the second-tier city as compared to first-tier city?
May Wu
Hi Robin. Let me try to answer these questions one by one. Overall the entry into second-tier cities, the impact of that is as following; first, as we mentioned or else equaled, the construction cost for building hotels in the first-tier city and the second-tier cities are similar, but the second-tier cities will have slightly lower RevPAR, therefore the operating margin at the hotel level in second-tier cities. Again all else equal, will be slightly lower from those in the first-tier cities, because of the depreciation impact. Depreciation will represent a slightly higher percentage of total revenue, for second-tier city hotels.
But, that impact will not be felt on EBITDA side. Therefore EBITDA for hotels in first-tier and second-tier cities should be similar, because if we only take into account the construction cost factor. So that's the first thing that will impact the first-tier versus second-tier hotels.
The second difference between the first-tier and second-tier hotels is of course the average daily rate difference. Typically, our list price in a first-tier city is above 199. So from 199 to 299, and for the second-tier cities, it ranges is from 179 to 199, in general. So, that's the second impact.
And then thirdly, in some but not all second-tier cities, that we entered, especially the new second-tier cities that we enter, it typically takes longer for a new hotel to ramp up. So, we've said our hotels typically take three to six months to ramp up. But, in Shanghai and Beijing, as well as in some second-tier cities, where we already have a good presence, it's more towards the shorter end of that. But, in new second-tier cities that we entered, it's most likely towards the high end of that.
Robin Roberts - Jayhawk Management
Okay. How about the occupancy rate? When the second-tier city is fully ramped up, how does the occupancy rate compare to first-tier cities?
May Wu
Once it ramps up, the occupancy rate is similar to first-tier cities, which is typically above 90%. The RevPAR difference in the second-tier cities versus the first-tier cities for major hotels will mostly be caused by average daily rate, not occupancy.
Robin Roberts - Jayhawk Management
Okay. But I thought that in tier-one cities like in Shanghai, your occupancy rate could be higher than 100%, because you are setting it hourly?
May Wu
We don't have hourly rates, we have a day rate, which is typically a RMB120 and you have to checkout before 6:00 pm, typically. And that's the same for the first-tier cities and second-tier cities. So, the second-tier city hotels once they ramp up, it could reach over 100% occupancy as well.
Robin Roberts - Jayhawk Management
Okay. While looking at the numbers, if occupancy is the same and your average daily rate is about 10% lower in second-tier cities, according to the number you quoted me, at least a 10% lower. And also your construction cost is the same. Does that mean that your margin in second-tier city is about 10% lower?
May Wu
Not as much. It will be, up to I would say 1% lower, because depreciation represents 8% to 9% of our operating expenses and in the second-tier cities, it will be towards the high-end or slightly higher. So, overall EBIT margin on the hotel level for the second-tier cities, may be about 1% lower compared to first-tier cities.
Robin Roberts - Jayhawk Management
And also for leased-and-operated hotels, your lease is about 74% to 76% of the revenue. In general, the real estate in China is going up, and so how is the trend of your lease in terms of absolute dollars, how fast has that gone up?
May Wu
First of all, the lease, rent and utilities typically represent 25% to 35% of leased-and-operated hotel costs depending on the quarter. And in this quarter, lease, rent and utilities represented 33.8% of leased-and-operated hotel costs. And so within that component, rent expense is in the high 20 percentage range. And in terms of the trend, I will let David comment on that.
David Sun
Yeah, this is David. In terms of channel, the risk is market in China, we are seeing a very, very clear sign in Beijing, Shanghai, all the very big cities. The risk price is going up, even the lease price. But that has not happened in most of the second-tier cities. So, in the pipeline, we feel very comfortable to get the price under control for our return on investment. So this is the risk market at this moment.
Robin Roberts - Jayhawk Management
Okay. So if I combined all of these together, your lease and rent has gone up in first-tier cities and you are going into second-tier cities, which has about 1% lower rent fully ramped up and you are also taking longer to ramp up even the second-tier cities. When I add all of these together, how should I think about the operating margin for the second quarter? Should it be increasing or decreasing or flat as compared to the first quarter?
May Wu
I think there are three factors that you need to take into account and arriving to the conclusion. I think for the leased-and-operated hotel level alone. If we had no new hotels under construction, that or else equal, operating margin for the leased-and-operated hotels will be slightly lower.
However, another important influencing factor, for the leased-and-operated hotel segment, is the number of new hotels under construction. And this also impacted our margin in the first quarter. So it will be difficult for us to comment really from quarter-to-quarter, specifically. But we believe on a full year basis, taking into account the slightly lower operating margin for the second-tier cities, but also taking to account the slightly increased franchise mix. We believe that on a full year basis, our operating net, not talking about SG&A, for the hotel segment our operating margin should be relatively stable compared to last year, plus or minus some small variations for the factors that I have mentioned.
David Sun
And on top of that, if you talk about the ramp-up period for the second-tier cities, new cities. We are generally more and more experienced to improve the ramp up period in second-tier cities. Because it has been like Shanghai or Beijing, we are up typically, before we have the NOE into the Shanghai-Beijing, it will take time to get the experience to improve the performance. But we believe, we are pretty confident to believe that we can generally experience to [reshuffle] with the ramp-up period for the second-tier cities in future.
Robin Roberts - Jayhawk Management
Alright, thank you very much.
David Sun
Thank you.
May Wu
Thank you.
Operator
(Operator Instructions). Your next question comes from the line of David Katz with CIBC World Markets. Please proceed.
David Katz - CIBC World Markets
Yes, hi good evening.
May Wu
Hi, David.
David Katz - CIBC World Markets
Taking a little longer term view, I guess we were a little bit surprised by the number of franchised hotels that entered the system in the quarter. And I think that you said it earlier that we should not expect to see too many more of those the rest of this year. Can you just add a little bit of color to that? What should we attribute the number of the franchised hotels that came in this quarter? And then give us seven-eight quarter outlook on these and make sure that we are still up to date with our views on that.
David Sun
I think the overall franchise strategy, we have not changed till we maintain the record or slightly increase our franchise mix. And David like I stated before, I think quarter-on-quarter the number would be a little bit different because of the contract time is different.
If you look at the pipeline, we have 48 hotels on the pipeline, 36 are leased-and-operated, and 12 are franchised-and-managed. So the percentage would be lower than 30% in the pipeline.
So in general we still want to maintain or slightly increase our franchise mix, but in every quarter that really depends on what the contract time is.
May Wu
Yes David, I want to add on that. As we had always mentioned that once we first enter in to a city, we will start from leased-and-operated hotels and we will then open those cities up for franchisees. What happened in the second half of 2006 is, because we entered into many new cities in mid 2006, and we started to open up new cities for franchisees, so as a result the franchise mix started to ramp up more quickly starting in mid 2006. But in late 2006 we started to enter into many new cities again, so as a result leased-and-operated mix started to increase slightly. So it will change from quarter-to-quarter and it's really a function of the number of new cities that we enter. And we entered into 13 new cities in the second half of 2006. So, that’s why while in the first half of 2006 we didn't enter that many.
So, in second half of 2006 you see more franchised hotels opened up and then now if you see in our pipeline it's a little more geared towards leased-and-operated gain. But the overall mix for franchised hotels will still move up overtime, but the pace of moving up will be more flattish or slower for the rest of the year.
David Katz - CIBC World Markets
So, if we were to look at those 12 hotels that you have for franchising your pipeline combined over the next three quarters, is that a fourth quarter ramp? What’s the right way to think about those from your best guess?
May Wu
For the 12 that are in the pipeline, it usually takes four to six months for those hotels to open. So, they will all come online before the end of the year and most likely in the second and third quarter. And also keep in mind that those 12 are as of the end of the first quarter and we will continue to sign up additional contracts and the same being said for leased-and-operated hotels.
David Katz - CIBC World Markets
Okay. And then just going back to some of Robin's questions, where you talking about some of the second-tiered city hotels that have just come on. What would you consider to be the length of time for ramp-up on those? Is that a 12-month ramp-up or something longer than that?
David Sun
I think, normally we take three to six months to ramp-up. But for second-tier cities we take about six, may be longer, specially, in the first quarter because the ramp-up period has met Chinese New Year. So they take a little bit longer than the normal conditions. So we still believe about six months is a time to ramp-up our operation in second-tier cities.
David Katz - CIBC World Markets
Great. One last one and then I'll give someone else a chance. But it looks like your short-term borrowings were up in the quarter? And forgive me I'm slumbering a little bit here, but it looks like your short-term borrowings were up according to your balance sheet. What was that attributed to, and I apologize if I missed it.
May Wu
Sure, no, you didn't miss anything. The short-term borrowing went up slightly, one, is because we completed our IPO in October of 2006. And then it takes time, again for us to exchange the currency and bring that money into China. So, in the first quarter of 2007 we only managed to bring in very limited amount of US dollars and convert them to RMB, while the working capital need is still increasing. That's one, and secondly, although the short-term borrowing went up, the long-term borrowing went down because we used to have a loan to a related party, which is a loan to Beijing Tourism Group, which is one of our shareholders and we repaid all that loan at the end of the first quarter.
David Katz - CIBC World Markets
One last one, I lied, one last question.
May Wu
Okay.
David Katz - CIBC World Markets
What are you seeing from your competitors out in the marketplace? Obviously with your growth, are they answering back in anyway? What do you observe in terms of their ramp up and some of their efforts?
David Sun
I think it's after we did this IPO that the market is getting pretty hot because a lot of money and a lot of people entered this market. Well competitor wise, we still only have one national competitor but the [restaurant] still is our regional competitor. They are waiting to expand their business in the future. Right now, we don't feel very strong pressure in the operation side, the only thing in the big cities like Shanghai, Beijing, Guangzhou or some big cities, the property competition will be getting stronger and stronger.
May Wu
Just to follow-up on David's question, and that's why it is intentionally our strategy at this time to expand more quickly in the second-tier cities, because we really see a lot of attractive opportunities in those cities and it's similar to how we started in Shanghai and Beijing and Guangzhou a few years ago. And now we are seeing a lot of Greenfield opportunities in the second-tier cities and we think that it is very important for us to achieve an early mover advantage. So, given our limited resource as we said, the reason we give guidance that we are going to grow 60% to 70% and not faster given the opportunity is that we want to make sure that we manage our risk as a high growth company. We would only want to grow as much as we think we can and comfortably managed.
With that in mind, right now we are seeing high return, more attractive opportunity in the second-tier cities. Although they have slightly lower margin because of the construction costs, but that's only if all else equaled. But if you are seeing a higher rent expenses in the first-tier cities, it will be more efficient from a return investment perspective for us to penetrate the second-tier cities first, again given our limited operational resource. So, that's a conscious decision and we believe that this strategy will allow us to benefit in the years to come.
David Katz - CIBC World Markets
Okay. I just want to make sure I heard you correctly. The short-term borrowings should be flat going forward, correct?
May Wu
I am sorry the short term--
David Katz - CIBC World Markets
The short-term borrowings--
May Wu
The short-term borrowings should remain stable in the second quarter and then depending on a few initiatives that we are working on. In May we may have to decrease that in later half, but in the near-term we expect that to be relatively stable.
David Katz - CIBC World Markets
Stable from present levels.
May Wu
That's correct.
David Katz - CIBC World Markets
Got it. Thanks very much.
May Wu
You're welcome.
Operator
Your next question comes from the line of Marisa Ho with Credit Suisse. Please proceed.
Marisa Ho - Credit Suisse
Hello Dave and hello May.
May Wu
Hi Marisa.
David Sun
Hi Marisa.
Marisa Ho - Credit Suisse
When you look at your first quarter occupancy number and also the RevPAR number, there was a slight slippage on the Q-on-Q basis and also on a year-on-year basis. You've also previously pointed out that first quarter is seasonally the weakest quarter in the year. So, what is your outlook for your occupancy and RevPAR, for the full year? Were you just expecting those numbers to be, just looking at a very minor dilution on a year-on-year basis?
May Wu
Well if you look at the first quarter, this year the RevPAR was 151 versus last year it was 157 so it's RMB6 or about 3% to 4% decrease compared to last year. This quarter it was solely caused by the year-over-year decrease in occupancy rate. Our analysis shows that the decrease in occupancy rates year-over-year were two folds. One is the second-tier cities that are taking longer to ramp-up and two; we were actually also somewhat impacted by the timing of the Chinese New Year. What happened was, the Chinese New Year this year started in mid February.
So, what happens is, the two weeks during the Chinese New Year, you will see low occupancy and the periods before Chinese New Year tends to be somewhat lukewarm and then activities really start to pickup after the Chinese New Year. So, this year we started to see pickup after the first week of March, while last year Chinese New Year was in the late January and early February. So, we started to see pickup really starting from the middle of February. So, that also caused some difference. But again we don't want to say this is the reason, but it did impact us. In terms of what we expect for the rest of the year, we continue to expect slightly lower ADR and slightly lower occupancy because of entering into new cities. But we always like to plan things a little conservatively and on a full year basis, again I think I've seen your numbers before and your RevPAR kind of year-over-year comparison, I think we are pretty comfortable with it.
Marisa Ho - Credit Suisse
Thank you.
May Wu
You are welcome.
Operator
Your next question comes from the line of Chris Woronka with Deutsche Bank. Please proceed.
May Wu
Hi Chris.
Chris Woronka - Deutsche Bank
Hi, David.
David Sun
Hi Chris.
Chris Woronka - Deutsche Bank
Hi, David. Hi, May. Quick question, I know on the last call you had mentioned that the full year to get to that 60% to 70% revenue growth you would do 70% or greater unit growth and you did a couple of hotels better than we saw in the first quarter. So just give sense as to where that stands, is it fair to say you are comfortable adding 70% unit growth this year, full year basis?
David Sun
Yes, I think we said that before, we want to grow 60% to 70 % income of the revenue. Given the 70% growth of the unit, we are in the fourth quarter we opened 11 and we have 48 on top line. The development helps to produce the new properties. So we are pretty confident to say that we are still on track to deliver that.
Chris Woronka - Deutsche Bank
Okay. And then that's very good and then has anything changed longer term? I know you don't have numbers to give us for 2008 yet, but, is it -- I mean is there any change now versus last time in terms of what you think internally? What kind of growth you will look for next year on the unit growth side?
May Wu
Chris, I don't think any of that has changed. I think in the first quarter numbers, you can see that the only thing that really fluctuated little bit is occupancy rate and as a result, margin and that impacted margins slightly. And we explain that the reason is, one, is because of increased entry in to second-tier cities and two, slightly timing difference of Chinese New Year. But, on a per hotel basis, on a per location basis, we had not seen any change in terms of the competitive dynamics or operating environment.
And the other thing I want to point out is, actually our revenue grew to 183 million, which is above the high-end guidance of 179 million that we had previously estimated. Representing 65% increase year-over-year. And that's with the lower occupancy rate and the timing of Chinese New Year impact. So, our majority hotels continued to exceed our expectations. So, we are not seeing any change in our business, it's just the quarter-over-quarter difference, nuances in each quarter.
Chris Woronka - Deutsche Bank
Okay, that's helpful. And than, I am sorry if you might have mentioned this earlier, but the units you expect to open for the balance of the year. Will there be any mix shift in terms of what percentage of those are in the second and third-tier markets versus the primary market and is there anything to look out for there, as it can be relatively, mostly in the newer markets?
David Sun
I think I mentioned before that for the first-tier city like Shanghai and Beijing, the risk price is pretty high, and also a lot of competitors. So our strategy is going to take early advantage going into the second-tier cities. So I think the majority of hotels we opened this year will be second-tier cities.
Chris Woronka - Deutsche Bank
Okay. Very good. Thank you very much.
David Sun
Thank you, Chris.
May Wu
Thank you.
Operator
(Operator Instructions). Your next question comes from the line of [Bo Hong] with [Horizon Capital]. Please proceed.
Bo Hong - Horizon Capital
Good morning. I wish to ask management's opinion on the industry. We have noticed that the operating income of Jinjiang Star, which is your larger competitor, is reported as a part of Jinjiang Hotel solicited in Hong Kong. We are noticing that they are experiencing a year-over-year decline in operating income. Now that we have seen your operating statistics and numbers for the first quarter. We are just wondering whether there is, you can comment on the industry, are we seeing an overcapacity problem in this industry?
May Wu
Hi Bo.
Bo Hong - Horizon Capital
Yeah.
May Wu
As we mentioned, we are not seeing our operating income net of stock-based compensation and the FOREX loss is up 34% plus year-over-year and our EBITDA is up 56.6% year-over-year net of stock-based comp and FOREX loss. And the only thing was that our occupancy rate was slightly lower compared to last year. It's purely a function of the timing of Chinese New Year as we enter into second-tier cities. But overall we still delivered stronger than expected revenue growth and most of that over performance came from our existing hotels.
So we are not seeing any change in the competitive front in our business. We cannot comment on our competitors, but we don't think there is oversupply in the markets that we are in and we are not seeing competitors taking away business against both the existing hotels and the new hotels that we are operating. So because of that, we are comfortable with our business strategy and our plans for the year. That's all what we can say. David you would like to add.
David Sun
Yeah, I think from industry-wide I think this is our strong advantage that we can expand our business not just in the first-tier cities and also nationwide but also in the second-tier cities. That the performance average is showing that we still can maintain and improve our operation nationwide. So, industry-wide still a lot of chance, even they are doing national expansion. But their management ability definitely can't handle all the national expansion that's a question I think. It's not demand and the supply problem.
May Wu
I want to point out another thing, our member's network membership increased to 268,000 at the end of first quarter and that compares to 200,000 at the end of Q4. That was a large increase and so we are very pleased to see that because that tells us that our brand is really gaining more and more recognition, and value to our customers.
Bo Hong - Horizon Capital
Thank you.
May Wu
You're very welcome.
David Sun
Thank you.
Operator
Your next question is a follow-up question from the line of Marisa Ho with Credit Suisse. Please proceed.
Marisa Ho - Credit Suisse
Hi, Dave.
May Wu
Hi Marisa.
David Sun
Hi Marisa.
Marisa Ho - Credit Suisse
Now May, is it possible for you to talk about your current thoughts on acquisition, compared to a organic growth strategy going forward?
May Wu
Let me start on that and David will add. The current quarter did not include any acquisitions. And we did raise additional funding in May and we did explain that the purpose of that is potential acquisition. Again, when we talk about acquisition, any of that will be in addition to our current plan. So we are sticking with our current organic growth plan. But as we are a high growth company and as we always try to do new things when we see opportunity, I think we want to be prepared when we see if the acquisition market provides any opportunity.
And there are three potential areas which we made the acquisition. One is acquiring other small hotel chains. And we are seeing, people ask us about competitive dynamic. Although we are not stealing any competitive pressure, we are seeing a lot of little competitors entering in to the market. And a lot of those are there because the market is hot and most of them lack hotel experience or operational expertise. So, while we continue to deliver solid result. We believe not everyone in the industry is doing that. Therefore, we believe that at some point there will be good opportunities coming our way and we are building internal capacity in preparation of such opportunity. But the timing of that is highly uncertain and we are keen on return on investment and not to over pay for anything, plus our organic pipeline is very strong. So we don't need to do any acquisitions, but we also don't want to miss any opportunity.
So, that’s one aspect and two, we said we may potentially acquire our franchises or acquiring properties. And the reason for that is these two are both going to be very-very small portion of our acquisition strategy, if any, and it's more opportunistic and in the case of franchisees, most of our franchisees are small business owners who operate various business in small scale and they are opportunistic and they became our franchises because they see the market is good and they were able to obtain their property on their attractive term. And in one case that happened recently in which we completed a franchise acquisition in the second quarter. It was because the franchisee came to us. The franchisee integrated oversees and didn’t want to manage the business any more and we were able to work out a deal that was satisfactory for both sides. And for us the most important point was they are attractive at about five times EBITDA.
So with these kinds of acquisitions, it brings on one more property into our leased-and-operated hotel pool. It is a very attractive location, the property was under a very attractive lease and it totally meets our existing return-on investment criteria.
So, these are the things that if there's an opportunity we may pursue. Of course that's given consideration, if we have sufficient resources such as to manage those .
And then on the properties acquisition front, again, because of the more favorable change in the property law in China, which gives the property owner more protection, and also has increased activity, in the state on enterprise to rationalize their real estate portfolio, previously by leasing but now we see increased sale activities. We are studying the potential return and availability of these and if the right opportunity comes that will provide us with the current type of return that we're generating we will also consider these.
But again, that does not represent any change in our strategy and our business model. These are just add-ons that if we have the additional capacity, we will do these in addition to our current business plans.
Operator
Your next question comes from the line of [Keith Yung] with Merrill Lynch, please proceed.
Keith Yung - Merrill Lynch
Hi May.
May Wu
Hi Keith
Keith Yung - Merrill Lynch
A few questions on the P&L front, I go through the P&L basically the loss from the foreign exchange; it seems to play a part on your net profit.
May Wu
Yes, unfortunately.
Keith Yung - Merrill Lynch
It is probably the latest to the US dollar holding offshore and I wanted to know how and why the progress of the conversion is so slow and do you have any indications for the full year?
May Wu
The conversion is slow because of the Chinese government restrictions, and restriction is especially tight, starting from second half of last year. That is because as you know, the government is trying very hard to protect and prevent any speculation in the currency, and to a certain extent to be more strict on foreign investment. So because of those two factors, every transaction that converts US dollar to RMB is screened by several different government entities to ensure that one; the converted currency is to be used for funding needs or investments right away so that what happens is, if we build a new hotel we have to show how much CapEx we need and when we need to pay the suppliers for that and so that we can bring the money in. This process will continue in the foreseeable future. We continue to explore potential methods that will allow us to do that more efficiently and faster. But really there is very limited means of doing so.
The same impact is felt by all our peers who are traded in not only US but Hong Kong markets; whoever has foreign currency on their balance sheet. You can only bring them in for particular activities, not even everything. For example, we can not apply to convert the currencies and convert them in to pay-off our debts. It can only be used for investment purposes or daily expenditures. So, unfortunately that's going to continue. But as we are traded in the US stock exchange and any appreciation in RMD will act to our converted operating results in US terms, but the dollar deposits are dollar deposits. So for a US investor, they are not really taking on any currency risk because of our dollar deposits.
Operator
Your next question comes from the line of [Chris See] with BMP. Please proceed.
Chris See - BMP Securities
Hello May, hello David.
May Wu
Hi Chris.
Chris See - BMP Securities
Congratulations on a good result. Yeah, I just have a quick question with regards to your current topic for your hotels, for instance the occupancy rate and the average daily rates for your first quarter. Can you just remind me about your performance during the Golden Week for your splendid statistics and also those figures for your first-tier cities?
David Sun
For our customer mix 60% to 70% on customer are business and the rest of them are EU travelers. So Chinese New Year and the Golden Week definitely will someway impact our business performance. So occupancy in the Chinese New Year time would be in some city, (inaudible) meritorious city, that's where we get very good performance. But in average, will be about 20% difference in what we call Chinese New Year times with that what you call a normal time. Sometimes it's even more than that, but for the quarter like October and May, that's still slightly impacted for our daily operation.
Chris See - BMP Securities
Okay, and how about for the overall quarter-to-date performance for your hotels? Is that pretty much in line with your first quarter statistics or its slightly better or quite flat for the situation?
May Wu
Because of the seasonality, second quarter is typically stronger than the first quarter. And I think again as we mentioned, we are not seeing any change in operating environment, let's say this year compared to last year and the only difference is we are entering to more second-tier cities and we think that sometime in selected second-tier cities it takes longer, slightly longer to ramp-up and of course the ADR is slightly lower. But one thing we want to mention is the second quarter is still progressing and we are still gaining more experience in those new second-tier cities that we entered. And one of the reasons they ramped-up so in the first quarter, partially because of the Chinese New Year. For example if you open a hotel in a second-tier city, let's say and especially the new cities, okay, if we enter into a second-tier city where we only have only have one or two hotels. And if they open in November, it's really difficult to read, like what the potential really is for that city. Because you get into the winter, you get into the Chinese New Year. So we still continue to gain experience in those cities and additional cities as we progress along. But overall we just want to say that so far again we are not seeing any changes in competitive dynamic or operating environment this year compared to last year.
Chris See - BMP Securities
Okay. Great thank you.
May Wu
Okay.
Operator
(Operator Instructions). Your next question comes from the line of Daniel Su with Citigroup. Please proceed.
Daniel Su - Citigroup
Hi. Did you say what percentage of your revenue is coming from members? You mentioned that the member count was 268,000?
May Wu
In the first quarter we had 48% of room nights coming from our member. And that figure was 44% for the full year of 2006.
Daniel Su - Citigroup
Okay. And then just a question on the pricing environment from competitor hotels in second-tier cities. As you are entering those second-tier markets do you see any increase in pricing pressure or just normal competitive landscape?
May Wu
Actually, in the second-tier cities, we see very limited competition and mostly local operators, mom-and-pops and small regional chains. Actually as you see in our first quarter, our average daily rate year-over-year was actually, did not decrease at all. Although, that's not an indication of how ADR would be for the rest of the year. But, overall, ADR is we are guessing the average daily rate as we expect how it will work or better. But, we are not feeling competitive pressure on average daily rate side.
Daniel Su - Citigroup
Thanks. And one more question. On your upfront franchise fees as well as the management fee, which was traditionally 5% to 6%. In second-tier cities, is this different and how is this trending overall for your existing results, the 5% to 6% rate?
David Sun
Yeah. In the second-tier we take them as same, what we call standard assets, what we said before. So it's not different first-tier city and second-tier cities for the management's internal (inaudible).
Daniel Su - Citigroup
Okay. And for the rates, is there any difference in the rates?
May Wu
No, The 5% to 6% is the same, 5% to 6% of growth revenue is the same for first-tier and second-tier cities.
Daniel Su - Citigroup
Okay. Thank you.
May Wu
You are very welcome. Because of the time I think we will just take one more participant.
Operator
Thank you. That question does come from the line of Marisa Ho of Credit Suisse with a follow-up. Please proceed.
Marisa Ho - Credit Suisse
Hi, I just have a very quick question on your tax exposure. You mentioned that the unified tax rate should be benefiting you. On the other hand, you also have one particular tax entity which is currently subject to a preparation rate. So, do you have a view on what the blended tax rate may look like beyond 2008?
May Wu
For the entity that generate franchise fees, we are now enjoying a favorable tax rate of 15%. We think that favorable achievements will continue for three to five years. Perhaps with the tiered ramp-up until it reaches 25% over that three-to-five year period and that's our best guess right now.
So, in another words, our 33% tax entities, starting from 2008 will enjoy a 25% tax rate. Right now, our overall tax rate net, if you take out the impact of stock-based compensation and the FOREX loss, both of which are not tax deductible. We have a tax rate of about 24%. And starting from 2008, again this 24% is the outcome of a mix of 15% and 33%. So starting in 2008, this 24% will likely go down to about, again it could be 19%, 20% and that gradually go back up to like 25% overtime.
Marisa Ho - Credit Suisse
Thank you very much.
May Wu
You are welcome.
Operator
At this time there are no further questions, I would not like to turn the call back over to management.
David Sun
Okay. Again, thank you for joining us today. If you have any further questions, please do not hesitate to contact myself, May or any of our Investor Relations representatives. Thank you.
May Wu
Thank you.
Operator
Thank you for your participation in today's conference. This concludes the presentation you may now disconnect. Good Day.
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