7 Days Group Holdings' CEO Discusses Q1 2013 Results

Days Group Holdings Limited (SVN) Q1 2013 Earnings Call May 13, 2013 Yuezhou Lin, CEO Earlier today we reported results for the first quarter of 2013. The company recorded net revenues of RMB641 million, an increase of 17.5% year over year, exceeding our revenue guidance. The net income attributable to our shareholders was RMB5.44 million, which was also the 13th consecutive profitable quarter for 7 Days since the first quarter of 2010. During the first quarter of 2013, the total number of hotel rooms for all of our hotels in operation increased by 35% year over year and the total transaction value or TTV has reached RMB1.52 billion, an increase of about 33% year-over-year which is a strong indicator of the company's rapidly increase brand influence and market share in China's economy hotel industry. We continue to execute our rapid growth strategy in first quarter 2013 with the addition of 82 new hotels to our network including each leased-and-operated hotels and 74 managed hotels. As of the end of the quarter, we had 1,427 hotels in operation, including 500 leased-and-operated hotels and 927 managed hotels with a presence in 223 cities across the country. When we include hotels, on the conversion, our total number of hotels by end of first quarter 2013 was 1,650. We expect to add 360 new hotels in all to our hotel portfolio during the fiscal year 2013 which we believe will make 7 Days Inc, the single largest hotel brand in China's economy hotel industry. Think June 2012, the company's long term development strategy has been shifted to focus more on the rapid expansion of managed hotels. We are pleased to see our number of hotels in operation, continually increasing while the geographic coverage of hotel network is expanding across the entire country. As a result, the company's spreading in points and its competitiveness have been improved significantly. Together with our rapid expansion over the past few years, we have continued to upgrade our hotel facilities and import services for our guests. For example, by providing high quality mattress and the free wine coverage. As of the first quarter 2013, we had 56.3 million members with 80% repeat customers. And the bookings went through our own website and smartphone apps were maintained and to portion of about 70%. We believe that our large membership base and the leading eCommerce platform will remain as one of the important growth drivers of the 7 Days future expansion. On March 22, the East China Hotel, Star Light award presentation ceremony was held in Guangzhou, 7 Days in was awarded China's fast economy hotel, this is yet another industry awards following the number one influence in economy hotel industry and the CCT rates our China brand received by the company last year. When the increasing scale of the company and improved brand influence we will further strengthen our core competence to drive the fast expansion of the company. The adoption of asset like approach was a focus on managed hotels allows us to ship to model with revenue growth driven by higher operating profits. We believe this shift is in-line with the development trends of the entire economy hotel industry, which enable us to optimize our revenue composition and improve the overall profitability. I will now turn the call over to Eric, to give you a more in-depth look at our financial results. Eric, please. Eric Haibing Wu, CFO Thank you, Yuezhou. Good morning and good evening to everyone on the line. We are pleased to report a strong quarter with top line growth exceeding our guidance. Turning to our results in more detail. As a reminder, all financial figures provided are in RMB. As shown on slide 7, in the first quarter we added 82 net new hotels comprising 8 leased-and-operated hotels and 74 managed hotels. In total, as of March 31, 2013 our network consisted of 1,427 hotels covering 223 cities and comprising 500 leased-and-operated hotels and 927 managed hotels. The pace of our new hotel openings, which has continued without strategic focus on managed hotels, remains healthy and we expect the pace to increase in the second half of the year in line with our historical trend. In addition, we are pleased with the pace of our geographical expansion as our hotel network now stretched across 223 cities in China. It's a significant achievement in a relatively short period of time. In general, the economy hotel market remains healthy with strong demand among business and leisure travelers for affordable logins with consistent quality. Both hallmarks of the 7 Days brand. In addition, we continue to see robust demand from existing and potential managed hotel partners. Further supporting our managed hotel strategy and underpinning the growth of economy hotels segment in general. We have also maintained a rapid pace of growth in our industry leading loyalty club membership which remains the largest in the industry and a core part of our business model. As noted on slide 8, as of March 31, 2013, we had approximately 56.3 million 7 Days club members, an increase of 46% year-over-year. Highlighting the benefit of our powerful eCommerce system, approximately 70% of the room nights sold or booked directly through our online system in the first quarter 2013. Our loyalty club and eCommerce system constitute key elements of our business model, and contributors to our growth. And we'll continue to count this important competitive advantage in the year ahead. Turning to our operational performance on slide 10, occupancy rates for leased-and-operated hotels was 75%, down from 79.5% in the first quarter of 2012. Occupancy rate for managed hotels was 75.5% down from 76.3% in the prior year period. Our occupancy rate was mainly impacted by macroeconomic factors with some of our customers adopting a more conservative approach to spending. Moving to slide 11, revenue per available room or RevPAR for leased-and-operated hotels in the first quarter was 124.1 compared 128.8 in the first quarter 2012. RevPAR for managed hotels in the first quarter 2013 was 117.1 compared to 16.1 in the same period of 2012. RevPAR for all hotels in the first quarter 2013 decreased to RMB119.7 from RMB121.5 in the first quarter of 2012. While, RevPAR for the leased-and-operated hotels was impacted by macroeconomic headwinds, we're pleased to see that RevPAR in the managed hotels and mature hotels remain stable, with an improvement now less than 1% year-over-year mainly driven by ADR increase. Let me now turn to our financial performance for the quarter. For the first quarter of 2013, hotel net revenue increased to RMB640.5 million up 17.5% year-over-year exceeding our guidance range. Gross revenue from lease and operative hotels increased by 14.9% year-over-year to RMB596.9 million and the gross revenue for manager hotels increased 39.5% year-over-year to RMB81.2 million. Our first quarter revenue growth was driven by the continued growth in the number of our hotels in operation. As shown on slide 12, total hotel operating costs for the first quarter were RMB556.9 million, representing 86.9% of total net revenue, up from 85.6% of total net revenue in the first quarter of 2012. Pre-opening expenses for the first quarter were RMB8.9 million compared to RMB13.9 million in the fourth quarter of 2012. Sales and marketing expenses in the first quarter were RMB16.1 million or 2.5% of total net revenues versus 2.3% in the year-ago period and 4.6% in the fourth quarter of 2012. G&A expenses for the first quarter were RMB53.8 million or 8.4% of total net revenues compared to 7.9% in Q1 2012 and 7.6% in the preceding quarter. The year-over-year increase in G&A expenses for the first quarter was primarily due to the expenses associated with the going private transaction involving the company, which were RMB11.7 million, about 1.8% of total net revenue. And the G&A expenses excluding deal related expenses were RMB42.1 million or 6.6% of total net revenues compared to RMB42.8 million or 7.9% of total net revenue in the same period of 2012. Moving to slide 13, income from operations was RMB13.7 million in the first quarter compared to RMB23.3 million in the same period last year. And non-GAAP income from operations for the first quarter was RMB20.4 million compared to RMB32.2 million in the first quarter of 2012. EBITDA was RMB106.2 million for the first quarter, a slight decrease from the same period last year, adjusted EBITDA which excludes share based compensation decreased by 1.5% from first quarter last year to RMB112.9 million. First quarter EBITDA margin was 16.6% compared to 19.4% in the prior year period and adjusted EBITDA margin was 17.6%, down from 21% in Q1 2012. Net income attributable to our shareholder in the first quarter was RMB5.4 million compared to RMB19 million in the first quarter of 2012 and non-GAAP net income was RMB12.1 million down from RMB27.8 million in Q1 2012. Our net margin, net income margin for the first quarter was 0.8% down from 3.5% in the first quarter of 2012. We remain well capitalized with a healthy and effectively managed balance sheet a summary of which is provided on slide 15. As of March 31, 2013, we had cash and the pledged bank deposit of RMB379.2 million, net operating cash flow for the first quarter decreased by 18.3% year-over-year to RMB76.6 million. We expect to generate increase in cash flow in the coming quarter as we continue to leverage our increasingly asset like portfolio as the proportion of managed hotels and our network continues to grow. We're pleased with our performance in what is typically a seasonally lower quarter, and we'll continue to execute our proven gross strategy in the year ahead. The economy hotel segment remains fundamentally sound with continued opportunity for expansion supported by strong customer demand and the fragmented nature of the market. Moving on to our guidance. We expect to generate total net revenue in the range of RMB735 million to RMB745 million in the second quarter of 2013. Source: Seeking Alpha from China Travel & Tourism News http://www.chinatraveltourismnews.com/

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