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Update Home Inns and Hotels (HMIN) in my Jubak's Picks portfolio
07/20/2012 4:54 pm EST
The ADRs have plunged from $31.92 on March 2 to $20.19 on June 4 before rallying to $22.66 on June 29, and now are in retreat again. The ADRs traded at $17 at 3 p.m. New York time on July 20.
Mark it down to a fear of growth without profits in China’s slumping economy in general and in the budget hotel sector in particular.
On May 11 Home Inns and Hotels reported first quarter results that showed a huge 66% year over year increase in revenue to $199.4 million, well above the $177.6 million consensus estimate on Wall Street. (If you take out the effects the Motel 168 acquisition, revenue was up 22.7% year over year.) For the second quarter, scheduled to be reported on August 9, the company raised revenue guidance to $277-$232 million versus the Wall Street consensus of $209.5 million.
That’s all about revenue, however.
For first quarter earnings the company reported a loss of 9 cents a share, 5 cents a share worse than Wall Street expectations.
See the potential problem? Management clearly knows how to grow revenue, but can it increase earnings?
If you had that worry, it only got worse on July 1 when Home Inns and Hotels reported that it had finished the acquisition of eJia Express, a regional economy hotel chain in Anhui Province, for $9.4 million in cash. The 13 acquired eJia Express hotels will be rebranded and added to the 32 the company already operates in Anhui Province. The earlier acquisition of the much bigger Motel 168 chain had already pushed the company’s hotel count to 1,479 at the end of the first quarter with another 218, then, under construction.
Is this a case of revenue “acquisition” run amuck with the consequent destruction of margins, earnings, and shareholder value? Or is this actually the case of a company buying up smaller competitors in a consolidating sector when the economy is weak in preparation for an eventual economic turn?
If you look at the important metrics for the hotel industry the answer is comforting. Amidst all this acquisition, Home Inns and Hotels is keeping occupancy rates and RevPAR (revenue per available room) within shouting distance of where these metrics stood in a stronger Chinese economy.
So, for example, excluding the newly acquired and still being rebranded and refurbished Motel 168 hotels, occupancy in the first quarter was 84.4%. That’s only down slightly from 85.1% in the first quarter of 2011 and down slightly more from the fourth quarter of 2011 when occupancy was 88.4%.
RevPAR, again excluding Motel 168, was also down at $139 from the first quarter of 2011 ($140) and from the fourth quarter of 2011 ($141) but not worryingly, to me anyway, so.
I think my target price for these ADRs deserves a trim in recognition of the slowdown in China’s economy. That slowdown looks likely to bottom in the third quarter of 2012, a quarter later than I had projected. So as of July 20 I’m cutting my previous target of $39 by December to $32 by March 2013.
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 http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Home Inns and Hotels 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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