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Executives

Ethan Ruan – IR Manager

David Sun – CEO

Huiping Yan – CFO

Analysts

Chenyi Lu – Cowen & Co.

Ella Ji – Oppenheimer & Co.

Liping Cai – William Blair & Co.

Adam Krejcik – Roth Capital Partners

Lin He – Morgan Stanley

Fawne Jiang – Brean Murray

Kenneth Fong – JP Morgan

Home Inns & Hotel Management, Inc. (HMIN) Q4 2011 Earnings Call March 8, 2012 9:00 PM ET

Operator

Ladies and gentlemen, thank you for standing by for Home Inns’ fourth quarter and full-year 2011 earnings conference call. (Operator Instructions).

I’d now like to hand 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 fourth quarter and full-year 2011 earnings results were released earlier and 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 the year, and May Yu, our Chief Strategy Officer. After the 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 US 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 laws.

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

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

David Sun

Hello, everyone, and thank you for joining us today as we go through our fourth quarter and full-year 2011 results.

2011 is a special year for Home Inns, despite challenges we faced including rising costs and a softening in the Chinese marketplace, particularly in the fourth quarter, Home Inns achieved major milestones throughout the year. We delivered our commitment of 1,000 opened hotels with our core Home Inns brand. We exceeded our annual target of opening with 306 new hotels including three new Yitel hotels under our [Yitel] brand.

We furthered our multi-brand strategy through the successful acquisitions of Motel 168, which strengthened our portfolio with over 300 new locations and a well-established [econ hotel] brand. With a sound integration plan and a solid execution, we are confident that investment in Motel 168 will add a significant value to our shareholders in the long run.

Increasing scale and penetration is only one aspect of our achievements. (inaudible) healthy and sustainable growth for the future is reflected in our relentless discipline in quality and cost control, productivity management, and people development. In an environment of increasing competitions for new locations and a rising operating cost, we continue to remain strong profitability with stable underlying cost structures for our core business. Further, our best practice have been imprinted across Motel 168 for operational improvement and initial results are very encouraging.

Although there are few uncertainties in the overall economy in China in 2012, we are confident that our strong business fundamentals will see us through to continue health growth in the long run. We believe the Chinese travel industry is still in its early development stage and our ranges of products and services will continue to be well-received. Supported by our stronger-than-ever pipeline, we plan to open 330 to 360 new hotels in 2012. This plan will promote our network expansion with a reasonable portfolio mix to further our market leadership position, to capture opportunities in the growth industry, and generally consistent financial results.

Before going into highlights of our operations for the past quarter and the full year of 2011, I would like to provide an update on our progress of the Motel 168 integration. We found no surprises post-closing, which allow us to focus on execution on integration plan. We are very pleased to report that our initial integration efforts has already generated positive results. We [secured] brand level and the region level leadership organization with (inaudible) from Home Inns and stabilized hotel level operation workforce.

Employees’ living condition and working environment have been improved dramatically. Sales and marketing platform including pricing structure have been revamped. Motel 168 customer loyalty program are integrated with Home Inns. And hotel utilization projects are well underway, which include facility renovations and refreshment of quality consumables. [Ways of] training have taken place at various levels of the organization, and a transparent and results-driven KPI program have been implemented. With the (inaudible) and empowered workforce combined with a clear goal-oriented company stewardship, Motel 168 delivered 73.5% occupancy rate and a RevPAR of RMB113 in the fourth quarter of 2011.

A mix of Chinese New Year holiday and low seasonality combined January and February, the occupancy for Motel 168 reached 66%. We are very encouraged by this improvement at Motel 168 in the [first five months], and we’ll further our integration efforts in the coming quarters.

Now, look at our operational results. Total revenues for the fourth quarter increased 64.2% year over year to RMB1.31 billion, including revenues of RMB367.6 million from Motel 168. Total revenues for the full year of 2011 increased 25% year over year to RMB3.96 billion.

New hotels opened -- new hotel opens for the quarter were very strong with 125 new hotels opened, include 54 new leased and operated hotel that include one new Yitel hotel and 71 new franchised and managed hotels that include one Yitel and also 10 Motel 168 hotels. For the full year, we opened a record 306 new hotels under the Home Inns and Yitel brands and 105 new lease and operated hotels and 201 new franchised and managed hotels. Our established track record and reputation is attracting more and more qualified franchisees who value our brand and our franchise management philosophy.

Combined average daily rates for Home Inns and Yitel was held flat at 173 only, 173, for the fourth quarter of 2011, compared to 173 in the fourth quarter of 2010. Combined occupancy rate for Home Inns and Yitel was 88.4%, compared to 90.4% in the fourth quarter of 2010, due to new hotels that was still ramping up and [relative] softness in the macro-environment. As a result, RevPAR for our Home Inns and Yitel hotels was 153 compared to 156 in the fourth quarter of 2010 after taking into account estimate RMB3 Expo benefit in the fourth quarter of 2010. Our Home Inns and Yitel hotel achieved a similar level of RevPAR.

For the full year excluding Motel 168, RevPAR was RMB156 compared with RMB164 in 2010, which was benefit from the Shanghai World Expo by estimated RMB7. There 663 Home Inns and Yitel hotels that had been in operation for at least 18[months. During the fourth quarter of 2011, RevPAR for this same group of hotels increased from 161 -- 162 to 163 from the fourth quarter of 2010. RevPAR for Home Inns and Yitel hotels located outside of Shanghai that had been in operation for at least 18 months during the fourth quarter of 2011 increased from 157 to 162 for the same group of hotels in the fourth quarter of 2010.

The RevPAR growth at mature hotels was achieved with 4% high average daily rate, offset slightly decrease in occupancy rate from 94.1% to 92.9% in 2011. This gives us a level of confidence that our overall operating environment is still very, very stable.

Our membership program for both Home Inns and Motel 168 continue to strengthen. As the December 31 of 2011, Home Inns had 5.09 million active non-corporate members, representing a 41% increase from 3.6 million as of December 31, 2010. As of December 31, 2011, Motel 168 brand had 2.47 million active non-corporate members. With our [integrated] member loyalty program, our membership will continue to provide a stable revenue base for our brands.

We conclude the year with robust development pipeline of 198 hotels contracted or under construction, of which 55 were leased and operated hotels include three hotels under the Motel 168 brand and 143 were franchised and managed hotels include 25 hotels under the Motel 168 brand. This provides us a solid starting point for our continued growth in 2012.

Looking ahead to the next 10 years of growth, we are full of confidence and conviction, despite short-term softness in the market which we expect to continue into the first half 2012. We believe the long-term micro-economy trends and outlook of China travel industry are stable and attractive. Our experience from the (inaudible) of the operations, [margin growth] and a stable profitability and a strategic vision and execution are our competitive advantages.

As we move through 2012, we will remain focused on the integration of Motel 168 as well as healthy organic growth, which combined will further our leadership position in the market and generate sustainable long-term value for our shareholders.

With that, let me turn the call to Huiping.

Huiping Yan

Thank you, David, and hello to everyone on the call. I'm pleased to discuss our fourth quarter and full-year 2011 results, and will then provide guidance for the first quarter and full year of 2012.

As I take you through the numbers, please note that I will only speak in terms of RMB unless specifically mentioned. For the fourth quarter of 2011, Home Inns’ total revenues were RMB1.31 billion, increasing 64.2% year over year. Excluding Motel 168, total revenues for the fourth quarter of 2011 were RMB942.3 million, an increase of 18.1% year over year.

For the full year of 2011, Home Inns’ total revenues were RMB3.96 billion, increasing 25% year over year. Excluding Motel 168, total revenues for the full year 2011 were RMB3.59 billion, an increase of 13.4% year over year.

Total revenues for the leased and operated hotels for the fourth quarter of 2011 were RMB1.18 billion, representing a 62.9% increase year over year and a 33.9% increase sequentially. Excluding Motel 168, total revenue from leased and operated hotels for the fourth quarter were RMB829.8 million, an increase of 14.5% year over year and a decrease of 5.9% sequentially. Excluding Motel 168, the year-over-year increase were mainly driven by a greater number of hotels in operations and a better RevPAR at our mature hotels, offsetting the Shanghai Expo impact, while the sequential decrease was mainly due to seasonality.

For the full year of 2011, total revenues for leased and operated hotels were RMB3.56 billion, representing a 22.3% increase year over year. Excluding Motel 168, total revenues for leased and operated hotels for the full year were RMB3.21 billion, an increase of 10.2% year over year.

Total revenues for franchised and managed hotels for the fourth quarter of 2011 were RMB128.7 million, representing a 76.3% increase year over year and a 21.5% increase sequentially. Excluding Motel 168, total revenues for franchised and managed hotels for the fourth quarter of 2011 were RMB112.5 million, an increase of 54% year over year and an increase of 6.2% sequentially. Excluding Motel 168, the year-over-year and sequential increase in revenue for franchised and managed hotels for the current quarter were mainly driven by a larger number of such hotels in operation.

For the full year of 2011, total revenues for franchised and managed hotels were RMB400 million, representing a 55.8% increase year over year, driven by a greater number of such hotels in operation. Motel 168 had 163 franchised and managed hotels as of December 31, 2011. Excluding Motel 168, total revenues from franchised and managed hotels for the full year were RMB383.7 million, an increase of 49.4% year over year.

Total operating costs and expense excluding share-based compensation expenses were RMB1.15 billion for the fourth quarter and RMB3.25 billion for the full year. Excluding Motel 168, operating costs and expenses excluding share-based compensation expenses and acquisition-related expenses were RMB793 million for the fourth quarter and RMB2.9 billion for the full year.

For the fourth quarter of 2011, total leased and operated hotels costs were RMB1.07 billion or 90.3% of leased and operated revenues. Excluding Motel 168, total leased and operated hotel costs for the fourth quarter of 2011 were RMB709.8 million, representing 85.5% of the leased and operated total revenues. This compares to 79.7% for the same quarter in 2010 and 76.5% for the previous quarter of 2011. The year-over-year increase in leased and operated hotel costs as a percentage of leased and operated hotel revenue was mainly due to the absence of one-time benefit from Shanghai World Expo, a higher mix of new hotels in ramp up with full costs but limited revenue contribution, and a higher pre-opening cost of RMB29.9 million for hotels under construction compared to RMB20.8 million in 2010. The sequential increase was driven mainly by seasonality.

For the full year of 2011, total leased and operated hotel costs were RMB2.96 billion. Leased and operated hotel costs as a percentage of leased and operated hotel revenues were 83.2%. Excluding Motel 168, total leased and operated hotel costs were RMB2.6 billion, representing 81.2% of the leased and operated hotel revenue compared to 74.7% in 2010. An increase in leased and operated hotel costs as a percentage of leased and operated hotel revenue was mainly due to the absence of one-time benefit from Shanghai World Expo, a higher mix of new hotels in ramp up, and a higher pre-opening cost of RMB102.3 million compared to RMB46.6 million in 2010.

Personnel costs of franchised and managed hotels for the fourth quarter of 2011 were RMB20.1 million, including share-based compensation expenses of RMB1.7 million, which represents 15.6% of total franchised and managed hotel revenues. This 15.6% compared to 16.5% for the same quarter in 2010 and 23.9% for the previous quarter of 2011. Excluding Motel 168, personnel costs of franchised and managed hotels for the fourth quarter of 2011 were RMB17.7 million including share-based compensation expenses of RMB1.7 million, representing 15.8% of franchised and managed hotel revenues.

For the full year, personnel costs of franchised and managed hotels were RMB72 million, including share-based compensation expenses of RMB3.4 million, or 18% of franchised and managed hotel revenues. This compared to 17.2% for the full-year 2010. Excluding Motel 168, personnel costs of franchised and managed hotels were RMB 69.7 million, including share-based compensation expenses of RMB3.4 million, representing 18.2% of franchised and managed hotel revenues.

Sales and marketing expenses for the fourth quarter of 2011 were RMB19.6 million, representing 1.5% of total revenues, compared to RMB7.3 million or 0.9% of total revenues in the same period of 2010. Higher increases in spending to enhance Home Inns' online presence gave rise to this increase. For the full year 2011, sales and marketing expenses were RMB44.5 million, representing 1.1% of total revenues, compared with RMB33.3 million or 1.1% of total revenues in 2010.

General and administrative expenses excluding share-based compensation, acquisition and integration costs were RMB62.1 million or 4.7% of total revenue, compared with 4.6% of total revenue in the fourth quarter of [2011]. General and administrative expenses excluding share-based compensation and acquisition integration costs were RMB198 million or 5.0% of total revenue, compared to that of 4.4% of total revenue in 2010.

The above discussed resulted in an income from operation excluding share-based compensation expenses and acquisition-related expenses for the fourth quarter of 2011 of RMB78.5 or 6.0% of total revenues. Excluding Motel 168, income from operations excluding share-based compensation expenses and acquisition-related expenses for the fourth quarter were RMB89.3 million or 9.5% of total revenue, compared to that of 14.5% of total revenue in the same period of 2010.

The main reason for the year-over-year decrease in income from operations as a percentage of total revenue were due to higher pre-opening costs, higher mix of new leased and operated hotels, with less favorable expense ratio in hotels that are fully ramped up, and the absence of the benefit from Shanghai World Expo in 2010.

For the full-year 2011, income from operations excluding share-based compensation expenses, acquisition-related expenses for the full year were RMB457.3 million or 11.5% of total revenue. Excluding Motel 168, income from operations excluding share-based compensation expenses and acquisition expenses for the full year was RMB468.1 million or 13% of total revenues, compared with RMB583.7 million or 18.4% for the previous year. This margin decline was mainly due to the absence of World Expo in 2010, which is a non-recurring event, and a higher pre-opening cost that more than doubled.

For the fourth quarter of 2011, adjusted EBITDA was RMB227.4 million. Excluding Motel 168, adjusted EBITDA was RMB187.8 million compared to RMB201.3 million in the same period of 2010. For the full-year 2011, adjusted EBITDA was RMB900.2 million. Excluding Motel 168, adjusted EBITDA for the full year of 2011 was RMB860.6 million compared to RMB918.8 million in 2010.

Adjusted net income attributable to Home Inns shareholders was RMB36.6 million for the fourth quarter of 2011. Excluding Motel 168, adjusted net income attributable to Home Inns shareholders was RMB35.2 million compared to RMB102.5 million for the same period in 2010. For the full year, adjusted net income was RMB326.1 million. Excluding Motel 168, adjusted net income was RMB324.6 million compared to RMB466.2 million in 2010.

Adjusted diluted earnings per ADS for the fourth quarter of 2010 were RMB0.73 or $0.12 in US dollars. Adjusted diluted earnings per ADS for the full year were RMB0.71 or $0.11 in US dollars. Adjusted diluted earnings per ADS for the full year were RMB6.92 or $1.10 in US dollars.

During the fourth quarter, the company generated a net operating cash flow of RMB211.8 million compared to RMB209.7 million in the same quarter of 2010. Capitalized expenditures for the fourth quarter were RMB238.1 million and related cash paid for capital expenditures during the quarter was RMB244 million.

In full-year 2011, the net operating cash flow was RMB798.5 million and capitalized expenditures were RMB909.1 million, while related cash paid for capital expenditures during the year was RMB739.9 million.

As of December 31, 2011, Home Inns had cash and cash equivalents of RMB1.79 billion. The outstanding balance of its convertible bonds issued in 2007 was RMB113.1 million, including principal and accrued interest.

Outstanding balance of the long-term financial liability measured as fair value (inaudible) from the convertible bond note issued in December 2010 was RMB971.7 million. The balance of short-term and long-term loans together was RMB1.51 billion.

Now moving on to review our outlook for the first quarter of 2012 and the full year. Home Inns expects to open 330 to 360 new hotels in 2012, including approximately 105 to 125 leased and operated hotels, and 225 to 235 franchised and managed hotels across our three brands.

Home Inns’ consolidated revenue for the 2012 full year are expected to be in the range of RMB5,851 million to RMB5,910 million, representing a 46.9% to 49.3% increase over 2011. Home Inns’ consolidated revenues for the first quarter of 2011 -- or 2012 are expected to be in the range of RMB1,210 million to RMB1,240 million.

Motel 168 brand is expected to contribute RMB1,575 million to RMB1,600 million revenue to the group for the full-year 2012. And its first quarter contribution are expected to be in the range of RMB320 million to RMB330 million revenue. These forecasts reflect Home Inns’ current and preliminary view, which is subject to change.

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

Question-and-Answer Session

Operator

(Operator Instructions).

Your first question comes from the line Chenyi Lu from Cowen & Co. Please ask your question.

Chenyi Lu – Cowen & Co.

Great. Thank you. Regarding the guidance, this question relates to, do you guys see the slowdown in the Chinese economy has impacted overall your business and also overall economics hotel chains business? Thank you.

Huiping Yan

Certainly. Thank you for your question. We did see a slight impact from the Chinese economy. It’s a relative softness in the fourth quarter. And our guidance in 2012 does reflect our current view. And so far we do expect the market to be stable, although there’s still some uncertainties, and enhance our growth, is projected in the level that was presented.

Chenyi Lu – Cowen & Co.

And now one more question. Regarding the integration of 168, can you give us update as to how the progression so far? And I also see you have some, the costs associated with integration and then also the acquisition costs. So, can you give us a view as to what the cost going forward in 2012 related to Motel 168? Thank you.

Huiping Yan

Sure. As mentioned by David earlier, we went into this integration for five months. The good news is that we didn’t find any surprises, so our initial estimated integration costs, between USD20 million to USD25 million is still in our range. And in 2011, we did incur integration costs, about RMB19.5 million in motels integration pipeline and cost. And we expect to incur the rest of the integration costs in 2012, mostly would be in the first half.

Now let’s get back to talk about the progress. It’s really promising that we are already seeing positive results coming from Motel 168 operations, and particularly, as mentioned earlier, the occupancy rate for January and February combined amidst the Chinese New Year, amidst the slow season, is 66%. So it’s rather encouraging that all of our initiatives put in place including [sorting through] the sales and marketing platform, improving the customer stay experience, as well as improving the employees’ living conditions, providing them the truth and knowhow of how to run an economy hotel property, and also properly incentivize them, created significant invigoration to the workforce. So we are quite excited looking into the rest of our integration period, particularly in 2012, to further enhance and improve its operations.

Chenyi Lu – Cowen & Co.

Great. Thank you.

Operator

Your next question comes from the line of Ella Ji from Oppenheimer. Please ask your question.

Ella Ji – Oppenheimer & Co.

Hi. Thank you. Good morning. So, with this positive trend you already seeing in Motel 168, do you think you can -- you have the potential to outperform your original target which is 75% of occupancy rate for the full year?

Huiping Yan

We are looking at an integration period of 12 to 18 months in total. Now, typically as you go into integration, we certainly have a very specific execution. Some of the early improvements is perhaps you could call it a low-hanging fruit. So the later further improvements will be a steeper climb, if you will. And so what we don’t want to be is to be over-exuberant. We still want to continue to work through in 2012, and especially when you are still anticipating uncertainties in the marketplace, we do want to focus on a prudency that is not going to be exceeding our original expectations.

Ella Ji – Oppenheimer & Co.

Do you have the occupancy rates of the same period, the last year, for Motel 168? Just want to get a sense of how much improvement you’ve seen.

Huiping Yan

Sure. For Motel 168, in the fourth quarter we have achieved in 2011 73%. And so, going into 2012, our January and February occupancy rate is about 66%. So, we do believe that going into 2012, and particularly into the second half of the year when economic conditions continue to stabilize and improve, we hope to target to get to a 75% occupancy rate range.

Ella Ji – Oppenheimer & Co.

Great. That’s helpful. And then my next question is about Yitel. I noticed that you will have a new Senior VP onboard for Yitel. So, should we expect any change strategically in the Yitel brand? And how many hotel -- or how many Yitel hotels do you expect to open next year?

Huiping Yan

We do not expect any change in the strategic direction of the Yitel initiative. And as you see, that we opened three new Yitels in 2011, and we have a few additional Yitels in the development. And we expect to open around four Yitels in 2012. And all these initiatives going on I think, you know, the activity -- both the development and operational activities are increasing, and hence, the addition of our Senior VP, Winston Wong, to add to our management team to strengthen the Yitel operation. We’re very pleased with this addition and we’re very pleased also with the early stage of promising feedback and comments on my customers.

What we’d like to point out is although we are a company that’s always focused our expansion, we care more about profitable expansion. And Yitel is a product that requires longer ramp-up period, so the three new Yitels that opened in late 2011 are still in ramp-up stage. We would like to see a more prudent business model and profitability before we go into a full-blown expansion. But we are pleased with the early results.

Ella Ji – Oppenheimer & Co.

Thank you. That’s very helpful. My last question is about the margins outlook for 2012. Huiping, I'm wondering if you can give us some colors of your expectation on year-over-year market trend.

Huiping Yan

Sure. I think in general terms, margin is typically impacted by several key factors in a hotel business. We have new hotels in the mix which will typically impact the margin. And as the presence of new hotels either it’s been a larger portion of the total portfolio or smaller, it will certainly have a different impact on the margin.

And then two, the mature hotels operations is also a factor that we look at in terms of the margin. In a stable environment, what we have previously achieved in the past is our mature hotels has consistently held the margin and their performances even in the rising cost environment are stable. So what we do expect in 2012 is the mature hotels will continue to do so.

And then the third element is certainly related to pre-opening expenses for the year, as we resume a faster pace of opening. And also the opening schedule of our new hotels, we do expect to see these -- the first and the third element or the items for consideration impacting our margin in 2012.

Ella Ji – Oppenheimer & Co.

Great. Thank you for the color.

Operator

Your next question comes from the line of Liping Cai from William Blair. Please ask your question.

Liping Cai – William Blair & Co.

Hi, good morning.

Huiping Yan

Good morning.

Liping Cai – William Blair & Co.

For the economic -- macroeconomic slowdown you have been seeing, is it across the board or in certain geographical areas? And then also for the slowdown, are there any difference that you are seeing for your business versus leisure customers?

Huiping Yan

Sure. The overall market is experiencing slowness or softness, or were, particularly so in the fourth quarter of 2011. And we are still, as of today, watching fairly closely to the trend. And the regional differentiations are not as prevalent, although we do know that certain area perhaps is more impacted by export businesses or by manufacturing business, do have greater challenges. But on the overall basis, it’s not extremely different.

Liping Cai – William Blair & Co.

And how about any difference between business versus leisure travelers? Is either segment stronger?

Huiping Yan

It’s hard to compare the two in a slow season because do not travel, people do not go for business as much as during the high season. So it’d be hard to say that the leisure travel is softer or stronger. But we did have certain comparisons during the Chinese New Year period, that for the same period of the seven holidays -- seven-day holidays, the performances are pretty flat. So that leads us to believe that there is no drastic change in the leisure travel, nor is there in the business.

Liping Cai – William Blair & Co.

Sure. And then for new hotel openings, how does the ramp-up period look like right now? And is ramp-up significantly different for new hotels located in tier 1 versus on lower-tier cities?

Huiping Yan

The ramp-up period is around six to nine months. And of course, as you very accurately point out, that in the lower-tier cities, especially when there is softness in the marketplace, the ramp-up may be relatively longer than the higher season or in the higher-tier cities. What we do experience in the overall portfolio is a slightly lengthened ramp-up. And we’re still attributing the main reasons to -- there are two. One is being that perhaps the macroeconomic environment does impact the business, impact the ramp-up, and particularly in the lower-tier cities. And then secondly, picking the lower-tier cities because its economic structures and business environment are still establishing and not as mature as the upper-tier cities. So we may experience a slower ramp-up if you compare the two distinct period performances.

Liping Cai – William Blair & Co.

That’s very helpful. Thank you, Huiping.

Huiping Yan

Sure. Thank you.

Operator

Your next question comes from the line of Adam Krejcik from Roth Capital Partners. Please ask your question.

Adam Krejcik – Roth Capital Partners

Yeah, hi there. So I had a couple of questions. First, beginning with Motel 168, just curious on the ADR. I'm surprised I guess that these properties has a lower average ADR versus your Home Inns. And then maybe you could kind of discuss any pricing power you have with Motel 168 as we look to 2012. And also for your Home Inns properties, do you plan to do any across-the-board price hikes or will it be more opportunistic in certain locations?

Huiping Yan

Sure. One of the key strategy we deployed in improving Motel 168’s performances is to manage the balance between price and the occupancy rate. And typically we try to do even with the new hotels opening is to push for the occupancy rate first. So we did some price sorting, and in that case, with Motel 168 as well, and focusing more on the occupancy rate.

So, ADR right now as it stands, maybe optically lower than Home Inns. But the goal or the plan is to, once we improve the occupancy rate, improve the performances, build sufficient flow of customers, then we will be adjusting the price back up.

Specifically with Motel 168, due to its relative higher concentration in the Shanghai-Yangtze Delta area, which are some of the key gateway cities, as well as its product and its customer base, which is more leisure, has higher leisure content and more fashion-oriented, so there is a distinction between Motel 168’s product and customer base to Home Inns. So, once we concluded our integration, we believe we could position Motel 168’s price at a higher point relate to Home Inns’ equivalent locations, probably about 5% to 10%.

Now, on Home Inns, our forecast for the year for the total revenue, again due to the uncertainties in the marketplace, we didn’t price in a systematic ADR increases. We do, however, consider opportunistically event-driven or season-driven or those type of one-off opportunities, and doing the pricing review on a more specific by specific case basis. So, for example, if the particular hotel has achieved consistent occupancy rate for the past three or six months and there is not as much new hotels being introduced into the marketplace, as well as a stable overall macroeconomic environment where customers are susceptible to price increases, then we will increase price.

So, in other words, to keep it simple, that we didn’t consider a systematic price increases in 2012’s forecast.

Adam Krejcik – Roth Capital Partners

Okay, that’s helpful. And then some follow-ups about also related to Motel 168, it appears like the non-room revenue or food and beverages is substantially for Motel 168, if I'm looking at this correctly. Is that just a function of the properties and the trend that’s going to continue throughout this year?

Huiping Yan

Sure. Very good question. This is really leaning to our specific strategy relating to the revenue mix at Motel 168. Historically, as you’re aware, that Motel 168 has a restaurant operation background. And we do look at Motel 168’s restaurant operations, it’s about eight to nine -- it’s about a significant higher percentage of total revenue compared to Home Inns.

However, that business is not necessarily generating encouraging or attractive profit. So, as well as we analyzed the customer base being budget hotel and also located in markets where restaurant outside the hotels are quite well-established, we don’t believe it’s beneficial for us to continue to keep the scale of Motel 168’s current food and beverage operations. So we will structurally reduce and continue to gradually reduce Motel 168’s food and beverage income or food and beverage operations, more focusing on increasing the room revenue going forward.

Adam Krejcik – Roth Capital Partners

Okay, that’s very helpful. And then my final question is, for franchisees for Motel 168, I just wonder, are the contracts similar in terms of the royalty structure, rev share, upfront payments for new franchisees? Or if not, are you going to align them with the contract structure you have with your Home Inns properties?

Huiping Yan

Yes. The franchise contract generally speaking are on very similar terms to -- compared to Home Inns. The structure is also very similar. You have the management fee, you have the use of the brand, as well as the initial fee. Now as we continue to enhance the Motel 168 franchise program, we will be aligning the two programs to be more -- having more parity.

Adam Krejcik – Roth Capital Partners

Okay. Great. Thank you very much.

Huiping Yan

Thank you, Adam.

Operator

Your next question comes from the line of Lin He from Morgan Stanley. Please ask your question.

Lin He – Morgan Stanley

Hi, good morning, David, Huiping, May and Ethan. Thanks for taking my questions. Hi.

First of all, a follow-up on the impact of economic slowdown you just mentioned. Well, if you compare the momentum in January and the February combined versus 4Q, have you seen a sequential decline, further decline of fundamental demands, or you think it’s pretty in line?

Huiping Yan

We haven’t seen a continued decline. Actually it’s stabilized, we believe, and just looking at our mature hotels’ performance and even also looking at Motel 168’s January/February combined performance, which is tracking Home Inns’ trend. So we don’t believe that it’s going to further deteriorate.

Lin He – Morgan Stanley

Okay, thank you. And then another follow-up in Motel 168 integration costs, you just mentioned that the majority of the remaining integration costs will be incurred in first half. Can you remind us how much of that will be expensed versus capitalized?

Huiping Yan

Sure. The total integration expense is about 85% to 90% is going to run through the P&L statement. If I may remind everyone that the majority or the bulk, lion’s share of the expenses is related to the hotel repair and maintenance. And those typically are, according to the accounting rules, charged to the P&L in the other line item, which includes repair and maintenance costs.

Lin He – Morgan Stanley

Okay. I see. And lastly a question on Ctrip coupon program. Ctrip started to match eLong in coupon in 4Q last year. Since Ctrip is a major partner of Home Inns, have you noticed any change, any impact on your business since Ctrip has launched that coupon business? Because in some -- is it possible that the net room rate a customer of Ctrip can get net of the coupon can be lower than your room rates on your website even for members? Will that divert your customer to Ctrip website?

Huiping Yan

Well, we -- first of all, Ctrip and all the other intermediary represents a very small portion of our total customer channels. The competition or the coupon war, we are not seeing any impact on our overall business. So it’s, to us, it’s neutral.

Lin He – Morgan Stanley

Okay. That’s very helpful. That’s all my questions. Thank you.

Operator

Your next question comes from the line of Fawne Jiang from Brean Murray. Please ask your question.

Fawne Jiang – Brean Murray

Good morning. Thank you for taking my questions.

Huiping Yan

Good morning.

Fawne Jiang – Brean Murray

Good morning. I just want to get a little better understanding regarding the margin profile for 2012 overall. Huiping, I guess the question is, for your standalone business for Home Inns, do you expect stabilizing margin for 2012, or what’s the margin trend you will likely see?

Huiping Yan

The margin trend is going to go down, and specifically, if I recall that we discussed the mature hotels. The mature hotels are going to be pretty much flat in protecting their margin. The new hotel mix in this -- in 2012 is going to have a greater impact on Home Inns and the core brand’s margin. The new hotels that we opened in 2011, particularly those opened in the last quarter of 2011, were brand-new hotels in 2012. So their impact on the margin is going to be quite significant, together with the additional new leased and operated hotels that are coming online. So there will be margin depression mainly due to that.

And of course the pre-opening expenses will be slightly higher compared to 2011. But main driver for the margin contraction is going to come from the new hotels.

Fawne Jiang – Brean Murray

Yeah, got it. It’s very helpful. Regarding your pre-opening costs for 2012, what’s the overall estimate, that line item? Also regarding the pre-opening costs, do you have any -- do you see any difference -- major difference between Home Inns hotel versus Motel 168 you could potentially open?

Huiping Yan

Sure. First, 2012, we are expecting about RMB120 million to RMB130 million pre-opening expenses. And that is going to be about 20% or so higher than 2011 due to our increased expansion plan and pace. The cost for pre-opening expenses between Home Inns and Motel 168 is quite similar. Now, be it there are -- the main portion or main component of pre-opening expenses is rental, Motel 168’s new opening we currently plan to be about five or so leased and operated hotel opening in 2012, is going to be towards the end of the year. Now, those hotels are still going to be perhaps still in the established markets where Home Inns already have presence or Motel already has presence.

For Home Inns, we are continually going into lower-tier cities and new markets. So, on a per unit basis, Home Inns pre-opening costs, again largely driven by local rental market and rental costs, is going to be slightly lower. But overall, they’re not significantly different.

Fawne Jiang – Brean Murray

Got. That’s very helpful. Next question, regarding the occupancy rate as well as the -- its relationship to the margin for Motel 168, I guess, what’s the overall occupancy rate for Motel 168 in 2011?

Huiping Yan

2011 overall occupancy rate is somewhere around 70 -- 68%, 70%. And what we are expecting to drive for is in 2012 to raise the margin to 75%, 80% -- and push for 80%. So that margin improvement will translate into revenue, real revenue increases as we guided for Motel 168 and also in prior discussions that our projection for Motel 168 is to gain about 8% to 10% on the revenue growth, on the top line. Now that is certainly going to boost its bottom-line margin rate because the cost structure is of course being revamped, but it’s going to be leveraged where we increase occupancy rate, fill those rooms that were previously not sold yet because the rental cost is already there. So we will see a reasonable margin lift due to the top-line increases.

Fawne Jiang – Brean Murray

Got it. That’s helpful. Last question, actually regarding your [operating expenses], you seem to have pretty stable operating expenses for your standalone business. Just wondering for 2012, for the combined business, are we going to see any significant increase on the operating expenses side?

Huiping Yan

Thank you for your question. And this is really speaking to our continued effort in manage our operation and control cost and looking for productivity, our operating expenses at the hotel level is, with regards to mature hotels, is to hold flat, as we mentioned, that our cost structure is relatively stable. And then secondly, on the SG&A and corporate leverage standpoint, we continue to find productivity and continue to drive efficiency with Motel 168 being added to our mix. We will find new opportunities to continue to enhance our leverage on our headquarter base.

I do want to point out though, there is a negative driver, the fact that the revenue coming from franchise hotels are becoming increasing portion of our total revenue. So, in that sense, the G&A leverage will be slightly diminished because of that. However, the big picture is continued profitability and stable cost structure is what we are driving for, and we are confident to achieve.

Fawne Jiang – Brean Murray

Got it. Thank you very much, Huiping.

Huiping Yan

Thank you.

Operator

Your next question comes from the line of Kenneth Fong from JP Morgan. Please ask your question.

Kenneth Fong – JP Morgan

Hello. Thanks for taking my question. My first question is regarding Motel 168, you mentioned in January and February the occupancy has increased to 66%. But how is -- if I look at like in terms of RevPAR, if you compare the same period, January and February 2011, how has it changed?

Huiping Yan

Sure. The RevPAR on a net basis is still positive, still increased.

Kenneth Fong – JP Morgan

Great. And the second thing is, it seems that not only the -- while the Motel 168 is ramping up, it seems that to a certain extent the core Home Inn operation is affected as well, as reflected the top line seems to miss the guidance a little bit. So, is this because a one-off impact that you have Motel 168 coming in and then this dilutes some of your membership base, or management efforts, or do you expect it to rebound afterwards, or you basically see it’s affected by other like one-off reasons?

Huiping Yan

Thank you very much. First of all, the slight revenue miss in 2011 on the core business is mainly drive by the two factors. One is the slight softness that we se in the marketplace, and then two is the ramp-up of the new hotels, particularly in a somewhat depressed market environment are slower. And of course we mentioned earlier the hotels that are ramping up, and ramping up in lower-tier cities is relatively slower. So, those are the reasons for our revenue shortage in 2011 for the core business.

Motel 168’s integration does take a lot of our focus. However, we have a great resource of -- we have a great human resource to tap into because it is indeed a very operational-intensive business. David had mentioned earlier in his discussion about Motel 168 that we have organized the leadership level of Motel 168 to contain existing motels prior employees as well as we deployed key leadership positions with Home Inns’ existing or prior experienced veterans to run the business. So it’s not detracting from our core business’ operations.

Kenneth Fong – JP Morgan

And from a regional perspective, are you seeing the weakness or the fourth quarter mainly coming from the second and third-tier cities? Because what I'm seeing is two of your other competitors also reported the results and they have more focus on tier 1 cities. It seems that the RevPAR trend for them is relatively holding up better. Is this because like, given Home Inn at amore nationwide distribution that you're more affected by the second, third-tier slowdown?

Huiping Yan

Sure. I think with our large presence and deep penetration across the nation, the impact on our business is different from some of the competitive brands where they are perhaps more concentrated in upper-tier city or a particular region in the country. Now with that said, our observation is that it’s not drastically different. There are pockets of market, for example, in Shanghai. Perhaps it’s still recovering; it’s recovering nicely. But it is still recovering and not certainly arrived where it used to be yet, at the level of performance. But overall we do believe this softness or this setback is temporary. We are optimistically looking forward to 2012 as particularly going into the second half of the year, where market conditions will improve.

Kenneth Fong – JP Morgan

Are you seeing some signs of improvement in the second or third-tier cities already in -- so far in --

Huiping Yan

We are seeing fairly stable performances comparison, so there is no decline, there is no continued deterioration, which provides a good level of confidence and a reasonable assessment. As we get out of or leaving the Chinese New Year and the low season behind us, we hope that things will improve.

Kenneth Fong – JP Morgan

Thank you very much. That’s all for me.

Huiping Yan

Sure. Thank you.

Operator

I would now like to hand the call back to today’s presenters. Please continued.

Huiping Yan

Thank you, everyone, again for your participation in today’s call. We are very much focused on integration of Motel 168 in 2012 as well as continued effort on developing Yitel. The core business is very stable, we are in a great shape. And we are looking forward to discuss with each one of you in greater detail as we go on the road. Thank you very much.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

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