Bill Simpson wrote an analysis of 7 Days Group Holding (NYSE:SVN) to TradingIPOs subscribers on November 15. The ADSs priced at $11, the top of the estimated range of $9 to $11, in the chain's initial public offering on Friday, November 20. 7 Days raised $111.1 million in the IPO.
The text of Mr. Simpson's original writeup follows:
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7 Days Group Holding plans on offering 10 million ADS at a range of $9-$11. If the over-allotment is exercised, the total deal size will be 11.6 million ADS. JP Morgan and Citi are leading the deal, Oppenheimer is co-managing. Post-ipo SVN will have an ADS equivalent of 50.6 million shares for a market cap of $506 million on a pricing of $10. Ipo proceeds will be utilized to repay debt and for general corporate purposes.
Founder and Chairman of the Board Boquan. He will own 25% of SVN post-ipo.
From the prospectus:
'We are a leading and fast growing national economy hotel chain based in China. We convert and operate limited service economy hotels across major metropolitan areas in China under our award-winning "7 Days Inn" brand.'
The hotels focus on value-conscious business and leisure travelers.
It's the third largest economy hotel chain in China with 283 hotels in operation, 48 of which were managed hotels, with 28,266 hotel rooms in 41 cities, and an additional 77 hotels with 7,476 hotel rooms under conversion. Once those hotels are completed, SVN will have a presence in 59 cities. SVN has eight million people registered with their rewards '7 Days Club'. SVN also has the top ranked website for Internet traffic among Chinese economy hotel chains.
As opposed to new construction, growth has been spurred by leasing and converting existing properties into 7 Days Inns. SVN does not own the property of any of their hotels. Growth has been swift: 5 hotels in 2 cities as of the end of 2005, to 24 hotels in 7 cities as of the end of 2006, to 106 hotels in 20 cities as of the end of 2007, to 223 hotels in 33 cities as of the end of 2008, to 283 hotels in 41 cities as of September 30, 2009.
Leading city locations are Beijing (34 hotels), Guangzhou (31 hotels), Shenzhen (31 hotels), Shanghai (23 hotels), and Wuhan (17 hotels).
Average occupancy rates were 88.1% and 88.4% for the year ended December 31, 2008 and the nine months ended September 30, 2009, respectively. Revenue per available room - approximately $20 US.
Sector - China's lodging industry has grown an average of 16% annually the past four years. The economy hotel niche has grown much swifter with 80% annual growth this decade. The top ten economy hotel operators in China had opened 1,736 hotels with 213,789 hotel rooms by the end of 2008. SVN believes there is still plenty of room for growth with 0.3 economy hotel rooms per 1,000 people in China in 2008, as compared to 2.5 economy hotel rooms per 1,000 people in the United States.
By paying debt off on ipo, SVN will have approximately $0.50 per share in net cash post-ipo.
Tax rate appears as if it will be in the 25% ballpark.
2009 - Numbers are pro forma as if SVN used ipo monies to pay down debt on 12/31/08. This gives us a better idea of how SVN is performing as they will look post-ipo. Revenues should be $170 million, a strong 66% increase over 2008. Growth is being fueled by aggressive growth in number of hotels under operation. Operating margins should be 8%, net margins 6%. Earnings per share should be in the $0.20 ballpark.
SVN is trending strong, improving operating expense ratios quarterly as they grow revenues through new hotels. 2010 is shaping up to be a solid year for SVN.
2010 - Revenues should grow to approximately $235 million, a 38% increase over 2009. Operating margins should improve sharply to 13%. Net margins plugging in a 25% tax rate should be a shade under 10%. Earnings per share should be $0.45. On a pricing of $10, SVN would trade 22 X's 2010 earnings.
Main public comparable here is Home Inns & Hotels Management (HMIN). A quick look at each:
HMIN - $1.41 billion market cap. Currently trading 45 X's 2010 estimates with a 20% revenue growth rate.
SVN - $506 million market cap at $10. Would trade 22 X's 2010 earnings with a 38% revenue growth rate.
SVN really helped themselves by paying off substantially all debt on ipo. By removing debt servicing, we get a much clearer picture of an operation trending very well into ipo. Revenue are growing nicely, SVN is expanding without harming occupancy rates and margins are improving quarterly. SVN looks to be coming public very reasonably valued compared to public rival HMIN, one of the more successful China ipos this decade. Easy recommend in range, SVN should be a good deal and work short and mid-term off of range.