Bidding War Will Test HMIN

03/22/2011 2:00 pm EST


Jim Jubak

Founder and Editor,

A rite of passage is coming soon for Home Inns and Hotels Management (HMIN), China’s biggest budget hotel chain.

Morgan Stanley (MS) has put China’s fifth-largest budget hotelier, Shanghai Motel Chain, up for sale—and like any good investment banker, it’s trying to get a bidding war started. So far, Home Inns and France’s Accor (ACRFF) hotel giant have expressed interest.

The initial price of $1 billion for Shanghai Motel’s 276 hotels and 40,000 rooms strikes me as steep. Outside analysts say a reasonable price is more like $400 million. (Morgan Stanley owns 59% of the chain. The bank is selling that stake and the 30% of the company owned by founder and CEO Shen Feiyu.)

Can Home Inns show its management chops by either working the bid down or walking away if the price is wrong? Or will the company just go for the growth, no matter what the cost? What the company does will tell investors a lot about its maturity.

Home Inns has the money. It has brought in investors such as Sequoia Capital to increase its firepower. And on March 7, the company announced 2010 revenue of $480 million (up 22% from 2009) and operating income of $80 million, up 113% from 2009. Operating cash flow came to $136 million in 2010.

But the company also has a very full plate. Plans call for organic growth by opening 260 to 280 new hotels in 2011. (Think about it—that’s as many as Shanghai Motel has put up for sale.) That’s after adding 208 hotels in 2010.

And the company launched a new mid-market brand, Yitel, in early 2011, with plans for three to four Yitel hotels in 2011.

Occupancy finished 2011 at a 90.4% rate, down as anticipated from the 95%-plus rate during the Shanghai exposition. But that number is solid, and I don’t think the market is anywhere near saturated. I mean, what’s 1,100 hotels—the company’s goal for the end of 2011—to 1.3 billion people in China?

The question is, can this company manage growth? The result of the Shanghai Motel auction will provide a good bit of the answer to that.

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 (JUBAX), 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 January. For a full list of the stocks in the fund as of the end of January, see the fund’s portfolio here.

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