Home Inns Makes a Bold Prediction

05/11/2012 4:11 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

The big question for the Chinese hotel chain was revenue guidance for the rest of 2012, and the company set the bar attractively high yesterday, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

I’d call the first-quarter report from Home Inns and Hotels Management (HMIN), delivered yesterday after the close of markets in New York, very reassuring.

Apparently, the stock market as a whole agrees. As of 2:45 today, the shares are up 5.1%. (Home Inns and Hotels Management is a member of my Jubak’s Picks portfolio.)

The quarter just concluded was indeed as messy as anyone expected. (See my recent post for more details.) China’s largest hotel chain missed earnings projections by 5 cents a share, reporting a loss of 9 cents a share on higher pre-opening costs and the costs of integrating the Motel 168 brand acquired in 2011.

So where’s the reassurance? Start with revenue for the quarter. Revenue climbed 66% from the first quarter of 2011 to $199 million. Wall Street had projected revenue of $178 million.

If you then dig into such hotel metrics as RevPAR (revenue per available room), you’ll see that this measure of revenue climbed slightly from 149 renminbi in the first quarter of 2011 to 151 renminbi in the first quarter of 2012—once you excluded the effects of the Motel 168 acquisition.

The occupancy rate—again, excluding the Motel 168 properties that are still being integrated into the company’s system—was 84.4% in the first quarter, a very slight dip from the 85.1% in the first quarter of 2011, and actually a remarkably good number given the slowing in the Chinese economy.

But what investors really wanted to hear was good news about the rest of 2012—and here the company delivered. For the second quarter, the company projected revenue of $227 to $232 million, versus the Wall Street consensus of $210 million.

It’s hard to tell how that increase in revenue translates into earnings, because of the continuing costs of the Motel 168 integration and the lag that a new hotel faces in getting revenue and profits up to the levels of a mature property. In 2011, Home Inns and Hotels added 615 properties through acquisition or construction to its now 1,479 hotels. (In the first quarter, the company added a net 53 new hotels.)

On the higher revenue guidance, I’m going to raise my target price for December 2012 by a token $1 a share, to $39, until I can see how quickly the company manages to increase margins at its new properties.

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 Polypore International 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 here.

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