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Home Inns and Hotels takes advantage of slumping stock prices in Shanghai
05/27/2011 3:00 pm EST
Today, May 27, the company bought 100% ownership of Motel 168 International Holdings (sometimes known, by me for instance, as Shanghai Motel Chain), China’s fifth largest budget hotel chain, for $470 million in cash and stock.
When Morgan Stanley (MS), which owns a controlling 59% of the company, originally put the chain up for sale late last year the asking price started at $1 billion. With the Shanghai stock market in a correction and with budget hotel companies reporting declines in earnings in the first quarter, that price seemed increasingly out of line.
Back on March 21 I wrote that this deal would be a right of passage for management at Home Inns and Hotels (http://jubakpicks.com/tag/hmin/ ) . Did they have the skill and discipline to work down the price or to walk away if it stayed near $1 billion or would they go for growth at any cost? Today’s price of $477 million is somewhat north of the $400 million that outside analysts had put on the deal, but I think it’s in the ballpark. Management has passed an important test in my opinion.
In the deal Home Inns and Hotels acquires 144 leased-and-operated and 137 franchised hotels most under the Motel 168 budget brand. A few hotels operate under the more up-market Motel 268 brand. That’s a significant addition to the 848 hotels the company already operates (with 178 under construction.)
For the year that ended in December 2010 Motel 168 had revenue of $262 million. In that same year Home Inns and Hotels had revenue of $480 million.
I think that this deal is part of a healthy consolidation of the Chinese lodging industry. The heady growth that drew so many companies into the market has slowed in 2011. For example, revenue at Home Inns and Hotels grew by just 10.8% year to year in the first quarter. That’s down from 14.2% year-to-year growth in the fourth quarter and 22% growth for all of 2010.
This slowdown isn’t surprising because the number of branded budget hotels in China grew at an annual rate of 82% a year from 2000 through 2008, and because growth in China’s travel industry looks to have slowed after the bump created by the Shanghai World Exposition that ended in October 2010. (The first quarter of the year also typically shows a slowdown in business travel due to the New Year holiday. Everybody in China travels then but most travel is to homes and family.)
Even with the slowdown the occupancy rate at Home Inns and Hotels was still at 85% in the first quarter, although that was a decline from 90% in the fourth quarter.
The New York traded ADR has popped 8.6% today on news of the deal to $40.71. Given the extreme volatility in China’s stock markets currently as everyone tries to figure out the direction of the Chinese economy, I don’t feel I’ve got to chase this one immediately. We should see a modest pullback (at the least) this summer and I’d look to pick up shares then at $35 or so. A reasonable target for later in 2011 or early in 2012 is the 52-week high of $54 a share.
This stock remains in my Watch List http://jubakpicks.com/ but I think we’re getting close to pulling the trigger.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Home Inns and Hotels Management as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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