Buy Home Inns and Hotels (HMIN) in my Jubak Picks 50 portfolio

01/17/2012 3:04 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Home Inns and Hotels Management (HMIN) is “now the indisputable leader in economy hotels” in China according to Deutsche Bank. I’d have to say I agree which is why I added the stock to my Jubak Picks 50 long-term portfolio http://jubakpicks.com// on Friday, January 13 (See my post http://jubakpicks.com/ on January 13 for all the changes to the portfolio.)

With the acquisition of Shanghai’s Motel 168 chain, Home Inns and Hotels strengthened its multi-brand strategy in the economy segment and expanded its geographic coverage. As the end of the third quarter the company operated 1,004 hotels (500 leased and operated and 504 franchised and managed) in 174 cities in China. Another 202 hotels were contracted or under construction at the end of the period. The company’s occupancy rate was 94.1% as of the end of the quarter. That was down slightly from 96.7% in the third quarter of 2010 and from 94.0% in the second quarter of 2011 due to more new hotels going into operation in the quarter than in those earlier quarters.

The past year hasn’t been kind to either the Chinese hotel industry or shares of Home Inns and Hotels. The industry built out rapidly when China’s economy was growing at 10% or better and has gone into a period of consolidation as economic growth slowed below 10% in 2011 and looks headed to 8.5% for 2012 as a whole. That has slammed the price of shares of hotel companies—for example, shares of Home Inns and Hotels were down 37% in 2011.

But the downturn is actually a long-term advantage to the stronger companies that can consolidate this market since it will leave them with a bigger market share when growth kicks up. The long-term trend that links increased household income with increased consumption of travel services including hotels remains intact. Between 2003 and 2008 the number of households with annual disposable incomes of more than $5,000 grew at a 31.7% compound annual rate. By 2020 the number of households in that category is projected to grow to 341 million from 134 million in 2008. During that same 2003 to 2008 period domestic tourism spending in China grew at an annual compound rate of 20.5%.

I think these shares may face tough going in the first half of 2012 if, as I suspect, investors focus on China’s slowing growth. But that fear should peak in mid-2012 and then gradually lessen as evidence accumulates that the growth rate of China’s economy has bottomed. The U.S. traded ADRs (American Depositary Receipts) closed at $27.18 on January 13. That’s toward the low end of the $44.86 to $22.09 price range for the shares over the last 52 weeks. If you have a shorter holding period than my long-term Jubak Picks 50 portfolio, I think you can look for a target price of $40 a share or so by December 2012 after that rough first six months of 2012.

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 Management as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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