Checking into China's Future

08/10/2010 12:23 pm EST

Focus: GLOBAL

Paul Goodwin

Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Things are looking up for Shanghai stocks and Chinese travelers in need of comfortable lodgings, writes Paul Goodwin in the Cabot China & Emerging Markets Report.

With earnings season grinding on, emerging markets stocks continue their long-term sideways movement. But the medium-term movement has lifted the Cabot China-Timer into a buy signal. While we don’t want to get over-enthusiastic, we will take the signal seriously.

The Halter USX China Index had a great run [recently], charging above its 25- and 50-day moving averages. And the lower (25-day) average has now turned decisively up, giving us a new Buy signal. But as a quick look at the daily chart of the Halter will tell you, the index is re-plowing ground that it has traversed repeatedly for the past 12 months. So, while we’re happy to have the Buy signal, we realize that there’s no real macro trend at work here. We will thus adjust our stance slightly, but will control our enthusiasm until we see some real conviction to the market’s behavior.

If you are interested in Chinese stocks, Home Inns & Hotels Management (Nasdaq: HMIN) is benefiting from a booming trend in [China]: travel.

For decades, travel within the People’s Republic was hard, with trains supplying most of the carrying capacity. The advent of modern highways, robust airline service, and disposable income has made travel more affordable and put many more Chinese on the tourism road.

Traditionally, Chinese travelers tended to just roll into whichever town they were visiting and then look around for a place to stay. No reservations, no guarantees, no nothing. It’s probably fair to say that the quality of accommodations varied widely.

But Home Inns has changed the picture, expanding from a string of ten hotels in four cities in 2003 to nearly 640 hotels in 121 cities across China. And every hotel has all the comforts of home (and often more), with air conditioning and water coolers in every room, modern baths, a complementary bath kit and fresh towels, [and] comfortable beds and pillows. The company’s motto: “Wherever you go, you’re always at home,” sets the standard.

The US model that comes to mind is Holiday Inn, the pioneering hotel chain that started with four hotels in Memphis, Tennessee, in 1953 and now has more than 1,800 locations worldwide. Even before McDonald’s (NYSE: MCD) ran with the idea, Holiday Inn pioneered the idea of duplicating a successful model in different locations. Home Inns & Hotels Management is on exactly the same path, but in an even bigger country.

HMIN has managed to climb and then hold its higher ground [this year], despite the market’s poor performance. And with no end in sight to China’s growth, there’s little doubt that Home Inns will continue to grow well into the future.

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