The economy of China Economy Hotel

In his annual letter to shareholders, Buffett said the “party is over”. He was referring to the insurance business, which is the cornerstone of Berkshire Hathaway.

It appears the party for the economy hotels in China is over too. You can read this Chinese article at Sina if you know Chinese. This is understandable because as the leader of this pack, Home Inns (Rujia, HMIN) got listed in the US in Nov. 2006, lots of money has been poured into this hot sector in China, notably the 7daysInn (fund by warburg pincus), Hanting (found by Home Inns founder Ji Qi, raised $85 million fund last year, about the same size of Home Inns’ IPO proceeds).

Now they are paying the price of over-investment and fierce competition thereafter. Let me quote the Chinese article:

锦江之星的这家店位于吴中路和桂林路口，这里并不是上海人气最高的地段。但在不足4公里长的吴中路周边，却挤下了莫泰、7天连锁酒店、上海优家旅店、上海东湖之旅虹锦酒店等超过8家经济型酒店，其中汉庭竟然在同一区段拥有两家店面！

English translation: JinJiang star hotel is located at intersection of WuZhong Rd. and GuiLin Rd., which is not a hot district in Shanghai. But along this less than 4km WuZhong Rd., there are more than 8 economy hotels including motel168, 7daysInn etc., and HanTing even has two hotels in this district!

(JinJiang Inn at Shanghai ChangNing Rd., March 2007, full size pic here.)

China market, Ningbo Younger, Olympics

The China doemestic stock market resumed trading after a week of recess (for the Lunar New Year). To the surprise of most people and an old Chinese saying “Kai Meng Hong”, the market opened down instead of up. It appears people are still nervous about the US economy and its fallout effect to China economy.

Home Inns and Longtop

Home Inns (HMIN) is raising fund through convertible bond (up to) $149 m (reuters news). It seems they still need the cash to expand.

Longtop got more analyst converge: Deutsche bank and Jefferies initiated with Buy with target price of $30 and $29, respectively. Quoted here:

Deutsche Bank initiates coverage on Longtop Financial Technologies (NYSE: LFT) with a Buy rating, setting a $30 price target, citing a great position within its quickly growing industry, unique barriers to entry and impressive operating results…

Jefferies initiated Longtop Financial (NYSE:LFT) with a Buy rating and $29 target, as they expect strong earnings growth over the next several years from an acceleration in P&L performance and the company’s attractive secular demand backdrop.

(image from thestockmasters.com)

Jinjiang Inn and Jinjiang group

Before leaving I stayed at the Jinjiang Inn 锦江之星 near Zhongshan park, so I had an oppertunity to check out the current status of Jinjiang Inn. I stayed in Jinjiang Inn two years ago near Century park at Pudong. Overall I liked the setting, the furniture. It appears to me Jinjiang Inn is more luxurious than Home Inns (Ru jia). But there is one minor problem this time: the windows did not close. When I tried to pull the handle of the window, the handle breaks. Being close to the busy Changning road, I had to bear the traffic noise all night. Over my 3 months stay in Shanghai, we also frequented the Jinjiang Chef restaurant, which is owned by Jinjiang Inn. The food there is good, I think. Because we got a membership card, there usually gave some discount for certain items.

Consumer series IV: China Youth Travel

I am resuming this series as I am in Shanghai, and I got first hand look at the consumer spending here. Travel industry grew very fast in recent years due to several factors:

1) The golden week, where people got one week break in Chinese New Year, May 1, and Oct 1;

2) People have more money to spend in general, especially young people want to more DIY travel (freedom tour instead of the good old group tour);

3) More sites have been developed, e.g., Sanya, Lijiang (Yunan), etc.

But the travel industry is highly fragmented in China. The main players include: the scenic sites (Huangshan, e’Mei Shan etc.); the travel agency; the airlines; and the hotels. The profit margin of travel agency business is not high, especially the domestic travel.

Home Inns HMIN stays in the game

Here is the Q2 results (Xinhua-PRNewswire). Besides revenue and earning, I’m more interested in the following numbers:

— During the second quarter of 2007, Home Inns opened 26 new hotels. As of June 30, 2007, the Home Inns hotel chain consisted of 171 hotels in operation with an additional 63 hotels under development, covering 66 cities in China.

Home Inns and Mindray

MR closed above HMIN the first time since its IPO last Sept. MR closed at 30.89, while HMIN closed at 30.81.

This comparison is mostly for fun. But seriously I do think HMIN is increasing under competitive pressure in China. Here is another hotel chain, Hanting Hotels, founded by Ji Qi, the co-founder of Ctrip and Home Inns. Recently it raised $85 m from VC, this is no small change considering Home Inns raised about similar amount last Oct. through IPO. In last two years Hanting Hotels targeted mostly business travellers who are willing to pay more than CNY 268, but this has changed since early this year, as they entering into the budget hotels arena (head to head against HMIN). In the past HanTing’s profit margin is about 5% higher than HMIN. Of course one can argue that the “budget hotels” pie in China is growing too, so all the players will benefit. I am curious to learn more about this as I’m coming back to China very soon.

On the other hand, it’s far more difficult to enter into the medical device business where Mindray is in, that’s one thing I liked about this business.

Last but not least, Starbucks will raise the price of its beverage by 9 cents starting next week.

Some interesting numbers

Heelys sold 5.1 million pairs of its walk/skate shoes in the US during 2006. Note in the US there are about 36 million kids between age of 6 to 14, Heelys’ core customer. In other words, every one out of 7 kids in the US got a pair of Heelys, which sells from $49.99. The question for Heelys is: how far can this go? Can they sell to the other 6 kids? Or can they make the existing customers come back?

As of last quarter, Home Inns (China) has 145 hotels in operation, with average 120 rooms per hotel (total about 18,000 rooms). Home Inns got about 268,000 members, which account for more than 40% of its sales (hotel stay). To make it simple, about 7,200 (= 18,000 * 40%) is reserved for the members. A quarter has 90 days, so there is 7,200 * 90 = 648,000 room nights. So on average each member stayed 2.5 (= 648,000/268,000) nights in Home Inns last quarter.

Home Inns experience: the good, the bad

Here is a happy Home Inns customer (from Google Finance). On the other hand, here is a not-so-happy Home Inns customer, Kunwei, who (I believe) has stayed in the US and Singapore for an extended period time before returning to China.

So how do we make all of these? Not too much. The thing I want to say is everyone has his/her own criteria. Also things normally acceptable to one person/group may not be acceptable to another person/group, e.g., men normally have greater tolerance over female on cleaness, smoke etc. I think majority of Home Inns customers are happy with the hotels. They got what they paid for: a clean room, and a comfortable bed.

Why I think MR is better than HMIN?

HMIN looked cheap these days, should we jump in and buy it? I have both MR and HMIN, and as a matter of fact, I bought some more HMIN after its disappointing earning report. My mistake. You may think because HMIN has been to $49, and now it’s trading $29.50, isn’t a big discount? Yes or No. I hope HMIN won’t go much lower because it is my largest holding now (I’m looking for opportunities to exit).