China's Economic Growth Trend

03/17/2014 11:00 am EST


Jim Jubak

Founder and Editor,

Given the worries of a China economic slowdown, it's not surprising this stock has been down, however, MoneyShow's Jim Jubak, thinks you can get a better picture of how the company is doing by looking at these measures, rather than just by looking at earnings and revenue growth.

We’ve been down this road with Home Inns and Hotels Management (HMIN) before. Which doesn’t make it any less scary.

The stock is down 22.2% in the last ten days—despite solid—but certainly not spectacular—results for the fourth quarter, reported on March 12.

The recent sell-off on worries about a slowdown in China’s economic growth, pretty much, mirrors the January plunge on China and emerging market worries. Then the shares fell 23.7% from December 31 to February 3, before rebounding, along with emerging market shares in general, by 15.1%, from February 3 to March 4.

When China’s markets slump and fear rises, Home Inns and Hotels Management is sold early and hard because, 1) as the big dog in the mid-to-low end of the lodging market in China, the company is seen as very exposed to shifts in growth in China’s economy, and 2) because the stock is so liquid that it is easy and cheap to sell at the slightest worry—and easy and cheap to rebuy when the trend shifts.

I don’t know if that makes Home Inns and Hotels a swing trade for you—it shows the volatility and (perhaps) the predictability of a good swing trade—or if you’ve got the cast iron constitution that will let you hold through this kind of volatility, but, in either case, you should still care about the most recent fundamentals. So let me run through them here. (Home Inns and Hotels is a member of my Jubak’s Picks portfolio.)

For the quarter, Home Inns and Hotels reported earnings of 27 cents a share, a 92.9% increase from the fourth quarter of 2012. Revenue climbed 9.9% to $249.6 million. Analysts had been expecting $260.3 million.

Because the company continues in expansion mode, I think you can get a better picture of how Home Inns and Hotels is doing by looking at other measures besides earnings and revenue. (The company opened another 437 hotels in 2013 to bring its total to 2,180. On March 10, the company announced that it would acquire Yunshang Siji Hotel Management, a chain of 35 hotels principally located in Yunnan Province.)

What measures?

Occupancy rate. The occupancy rate edged upwards to 84.08% in the quarter from 83.8% in the fourth quarter of 2012.

Revenue per available room (RevPAR). RevPAR held almost steady at $137 for the quarter versus $138 in the fourth quarter of 2012.

Why are those numbers so important?

First, because when a company is expanding as fast as Home Inns and Hotels Management is, investors want to see evidence that the expansion isn’t over-saturating the market, and that, as newly-built hotels mature, they are generating the same kinds of occupancy and revenue numbers as older hotels. That looks to be the case here.

Second, because the company is making a transition from a leased-and-operated business model to a franchise model. That shift reduces the company’s need for capital to expand—or, more accurately, gives it another revenue stream of franchise fees to fund expansion—and promises steadier and more predictable revenue and income growth. That’s all to the good—especially when China’s financial system is experiencing so much uncertainty and stress—but, as an investor, you don’t want to see the company give up too much growth to achieve that greater predictability. That doesn’t look to be the case here. For the first quarter of 2014, the company told analysts to expect total revenue of $1.46 billion to $1.49 billion yuan versus the analyst consensus of $1.52 billion yuan.

I’m not expecting the volatility in these shares to go away until investors get reasonably comfortable with the growth trend in China’s economy. As of March 14, I’m leaving my target price at $43 a share by August.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The 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 December. For a full list of the stocks in the fund see the fund’s portfolio here.

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