Home Inns & Hotels Management's CEO Discusses Q3 2012 Results

Source: Seeking Alpha David Sun - Chief Executive Officer Hello, everyone, and thank you for joining us today to discuss our third quarter 2012 results. We are pleased to have achieved another quarter of solid results. We experienced normal seasonality during the third quarter. The broad operating environment remained subdued and th ere has been no clear sign to recovery. Our core business delivered stable performance despite absence of systematic pricing increase. Integration of Motel 168 generated another set of continued operating metrics improvement. Yitel brand of hotels are establishing healthy development framework and operating [lesson]. Our cost control and productivity initiatives at both hotel level as well as corporate level are effectively addressing rising costs and helping to protect margins. And we expect to exceed our new hotel opening targets for the full year driven by strong and mature programs of franchised-and-managed hotels. The company is well-positioned to leverage its solid business fundamentals to navigate through challenging time and to capitalize on the long-term growth prospects within the travel and lodging industry in China. Turning to specific results, total revenues for third quarter increased 61.8% year over year to RMB1.6 billi on. Our organic revenue reached RMB1.2 billion, a 21.4% growth year over year, exceeding our previous guidance. The uneven market condition throughout China, depending on the level of concentration of manufacturing industries and the maturities in economic development, presents challenges as well as opportunities for us to operate [homogeneous] hotel products. We see the price opportunities driven by seasonality and events in relatively strong markets and effectively managing the yield between price and occupancy rate in soft market -- in soft markets. Occupancy rate of the core business was still relatively high at 92.7% compared with 94.1% in the same quarter last year. And the RevPAR of RMB164 this quarter compared with RMB169 a year ago was in line with market conditions. Excluding Motel 168, 833 mature hotels that have been in operation for at least 18 months achieved RevPAR of RMB177, flat from last year. By end of the third quarter, we had six hotels operat ing under the midscale Yitel brand, four of which have been operation for nine months or less. The overall occupancy rate for the Yitel was 89.2% in the third quarter. We are very encouraged by the development of the Yitel framework and excited about its future to further our multi-brand strategy. Total revenue for Motel 168 was RMB398.9 million in the third quarter, coming at the high end of the revenue guidance. Occupancy rate and average daily rate continued to increase, taking advantage of seasonality as well as incremental benefit from integration efforts. The core branded operation armed to address the challenging of large-scale hotels is showing positive results, with double-digit increase in RevPAR by the entire base during the preliminary testing period. Based on this initiative success, we have identified another 15 to 20 locations to gradually adopt this conversion in the next six months. The restructuring of Motel 168 to food and beverage op eration had been consolidated with co-branded initiatives. To further update everyone to Motel 168 integration, I'm pleased to report that as of November 1, Motel 168 and the core Home Inn brands will consolidate to form the economy hotels, led by our Chief Operations Officer. After the first stage of stabilization and foundation building, this reorganization is another step forward in our integration plan to fully leverage the company's institutional strengths and maximize resource utilization at regional and city operation levels to drive execution effectiveness. Moving on the hotel development, we opened a total of 108 new hotels, including 39 new leased-and-operated hotels, including two Yitel hotels and two Motel 168 hotels, and 69 new franchised-and-managed hotels, of which four were franchised-and-managed hotels for Motel 168 brand. Compared to the previous few quarters, we have improved our hotel operation pace given the healthy flow in the pipeline. At th e end of third quarter, we had a robust pipeline of 252 hotels constructed or under construction, including 87 leased-and-operated hotels and 165 franchised-and-managed hotels. We believe our well-established and high-margin franchise platform will be a key aspect of our portfolio's growth and profitability expansion. Driven by strong demand in our franchised-and-managed hotels, we expect to open no less than 360 hotels in total for the year and exceed the high end of our new hotels opening guidance for the year. As of September 30, 2012, our frequent guest program reached a new level of 10.6 million unique active non-corporate numbers, increased from 9.2 million as of June 30, 2012. Home Inns is voted the Chinese brand of the year 2012 by Chinese Central Television or CCTV, one of the largest television broadcasters in China. We continue to capitalize on our increasing brand value and our loyalty program continues to provide a stable revenue base across all our h otel brands. In the first part of the year we implemented a new wave of cost control and productivity initiatives. The third quarter results showing the hotel personnel cost increase at our core business will keep below the level of revenue growth. Further, G&A as a percentage of gross revenue for the total group continued to decrease year over year as our headquarter operation generated further productivity gains during the quarter. The ability to manage and keep the cost increase in check is one of our competitive advantages and we expect to continue to benefit from the scale and leverage across the business as we grow our multi-brand portfolios. Looking into the next six to nine months, we remain cautiously optimistic that the market environment may remain stable but material improvements may be slowly sure to come. We remain positive, however, on the long-term view of the growth of the Chinese economy and we'll continue to strengthen our brand equit y and the scale of our networks. Combining a stable level of annual [unit expansion], a shift towards capital-free but margin-rich franchise growth [and space], well-integrated Motel 168 brand ready for new growth, fully-developed Yitel brand for scalable expansion, lean and productivity-driven operating structure and leverage, the company is strategically well-positioned better than ever to wade through external challenges and embark on another cycle of growth in revenues, profitability and cash generation in the near future. With that, I will turn to Huiping. Huiping Yan - Chief Financial Officer Thank you, David, and hello to everyone on the call. I'm pleased to first discuss our third quarter results and will then provide our guidance for the full year. Once again the company has consolidated Motel 168 operation and financial results since October 2011, we have presented consolidated group numbers in the main body of our earnings re lease. Business and financial figures exclusive of Motel 168 are being presented separately in an appendix to the earnings release. Financial data for the group and exclusive of Motel 168 are also presented in spreadsheet attached to our earnings release, which is available for download from our Investor Relations website. On this call I will review group financial results as well as selected non-Motel 168 information to provide more context. As I take you through the numbers, please note that I only speak in RMB terms unless specifically mentioned. For the third quarter, total revenues for Home Inns Group were RMB1.6 billion, increasing 61.8% year over year. Excluding Motel 168, total revenues were RMB1.2 billion, an increase of 21.4% year over year. Total revenue from leased-and-operated hotels was RMB1.43 billion, a 62.3% increase year over year and a 10% increase sequentially. Excluding Motel 168, total revenues for leased-and-operated hotels were RMB1.0 5 billion, increasing 19.1% year over year and 11.7% sequentially. Total revenues for franchised-and-managed hotels were RMB166.6 million, increasing 57.2% year over year and 11.3% sequentially. Excluding Motel 168, total revenues for franchised-and-managed hotels were RMB148.8 million, increasing 40.5% year over year and 12.7% sequentially. Total operating costs and expenses excluding share-based compensation expense, acquisition and integration costs, were RMB1.3 billion, representing 81.6% of total revenues, compared with RMB77.6 for the same quarter a year ago and 82.4% for the previous quarter. Total leased-and-operated hotel costs excluding share-based compensation expenses and integration costs were RMB1.19 billion, 82% of the leased-and-operated hotel revenues, compared to 76.3% of leased-and-operated hotel revenues in the same period of 2011, and 84.3% in last quarter. This year-over-year increase in expense ratio was mainly driven by overall soft m arket conditions not suitable for systematic price increases, higher cost ratio from Motel 168 hotels which are still being integrated, and certain non-recurring charges to other operating costs. The sequential decrease in this ratio was mainly driven by seasonality. Excluding Motel 168, total leased-and-operated hotel costs, excluding share-based compensation expenses, integration costs, were RMB836.7 million, representing 79.6% of the leased-and-operated hotel revenues, compared to 76.3% for the same quarter in 2011 and 81.8% for the second quarter of 2012. The year-over-year increase in this expense ratio was again mainly driven by softer market conditions resulting in lack of price opportunities and certain one-time charges. The sequential increase in this ratio was mainly attributable to seasonality. Excluding share-based compensation expenses, personnel cost of franchised-and-managed hotels was RMB42.6 million, representing 25.6% of franchised-and -managed hotels revenues. This compared to 22.4% for the same quarter of 2011 and 20.2% for the second quarter of 2012. The year-over-year increase in its ratio was mainly due to impact of Motel 168 as the revenue from franchised-and-managed hotels at Motel 168 was relatively lower while it's been integrated. The sequential increase in this ratio was mainly due to a higher accrual of performance-based bonuses in the third quarter. Excluding Motel 168, total personnel costs of franchised-and-managed hotels excluding share-based compensation expenses were RMB35.1 million, representing 23.6% of franchised-and-managed hotel revenues compared to 22.4% for the third quarter of 2011 and 18.8% for the second quarter of 2012. The slight year-over-year increase in this expense ratio are driven by slightly lower revenue base due to market conditions, while the increase in dollar amount of such costs are in line with unit increase of franchised-and-managed hotels. The sequent ial increase in this ratio was mainly due to a higher bonus accrual of performance-based bonus in this quarter. Excluding share-based compensation expenses, sales and marketing expense were RMB17.9 million, representing 1.1% of total revenues, compared to 1.6% in the same period a year ago and 1.0% in the second quarter 2012. We maintain vigilant cost control on maximizing return on investment, and the level of sales and marketing spending is well-managed to continue to support a growing revenue base. General and administrative expenses excluding share-based compensation expense and integration costs were RMB57.4 million or 3.6% of total revenues, compared with 5.5% of the total revenues in the same period of 2011 and 3.7% in the second quarter of 2012. The company continues to benefit from economy of scale and leverage. The above resulted in an income from operations, excluding share-based compensation expenses, acquisition and integration c osts, of RMB204.7 million or 12.8% of total revenues, compared to RMB160 million or 16.2% of total revenues in the same period 2011 and RMB170.4 million or 11.8% of total revenues in the second quarter 2012. The year-over-year decrease in the ratio of income from operations was mainly caused by a higher cost ratio at Motel 168, absence of systematic selling price increase, and one-time charges. The sequential increase was mainly due to seasonality. Adjusted EBITDA was RMB375.5 million or 23.5% of total revenues compared to RMB272.9 million or 27.6% of total revenues in the same period in 2011 and RMB331.6 million or 22.9% of total revenues in the second quarter of 2012. Excluding Motel 168, adjusted EBITDA was RMB322.3 million or 26.9% of total revenues compared to RMB272.9 million or 27.6% of total revenues in the same period of 2011 and RMB274.3 million or 25.6% of total revenues for the second quarter of 2012. Adjusted net income attributable to Home Inns Group's shareholders was RMB135.8 million for the third quarter compared to adjusted net income of RMB132.0 million in the same period of 2011 and adjusted net income of RMB108.5 million for the second quarter of 2012. Adjusted diluted earnings per ADS for the third quarter of 2012 was RMB2.93 or USD0.47. During the third quarter, the company generated a net operating cash flow of RMB239.9 million compared to RMB276.9 million in the same quarter of 2011. Capitalized expenditures for the third quarter 2012 were RMB357.4 million, while related cash paid for CapEx during the quarter was RMB225.3 million. We believe the cash generation capability of the company will strengthen as Motel 168 performance further improves and normal annual price increases resume when market condition improves. As of September 30, 2012, Home Inns Group had cash and cash equivalents of RMB752.5 million. The outstanding balance of convertible bonds issued in 2007 was RMB113. 5 million including principal and accrued interests. Financial liability of the convertible notes issued in December 2010 and interest rate swap contracts both measured at fair value totaled RMB1.03 billion. During the third quarter, the company paid an additional USD21 million towards it US dollar denominated four-year term loan, bringing the outstanding [face] balance of the term loan down to USD124 million. For outlook, we expect a stable operating environment in a broad sense and uncertainties within certain markets relatively more impacted by economic structural reform. We are reaffirming our previously provided revenue expectations for the full year of 2012 which are gross revenues for the total group are expected to be in the range of RMB5,715 million to RMB5,810 million. Gross revenues for Motel 168 brand for the full year are expected to be in the range of RMB1,475 million to RMB1,500 million. Gross revenues for the full year of 2012 excluding Motel 168 a re expected to be in the range of RMB4,240 million to RMB4,310 million. The company expects to deliver on our leased-and-operated hotel opening target of 105 to 125 hotels for the full year. And as David mentioned earlier, the strong growth momentum of franchised-and-managed hotels will top the total number of our new hotel openings in 2012 over the high end of our previous guidance of 360. Above forecasts reflect the company's current and preliminary view which are subject to change. from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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