“Number One Tier Two Monster”

By Travis Johnson, Stock Gumshoe, August 7, 2007

So if you’re reading this one first, you missed out on the explanation … if you want the full story (and another lovely Gumshoe read) start with my other writeup that feeds from this same email ad, for Bill Mann’s Global Gains service over at the Motley Fool.

This is the second teased stock from that email about profiting from China and India and the growth of their second tier cities — here’s what we’re given in that teaser:

This one’s in China, again spreading out to the hinterlands and the second tier cities … this is what they call the “Tier Two Monster #1”

It’s somewhat related to Ctrip, the big Chinese internet travel agency (which I think we’ve seen recommended by a few services in the last six months or so).

“Just like Ctrip, this industry leader has a massive first-mover advantage and is swimming right in the slipstream of the powerful Chinese government … but there’s an even bigger reason for you to expect this company to replicate Ctrip’s phenomenal success, rewarding investors like us generously in the process: Both companies share the same visionary founder.”

The company was named “2006 IPO of the Year” in the U.S.

Revenues jumped 613% between 2004 and 2006, and 65.5% in the most recent quarter.

So? Ready for this one? The mighty Gumshoe has consulted his coffee grounds and determined that this “Tier Two Monster” is …

Home Inns and Hotel Management (HMIN)

This is, for those who haven’t come across it before, the Holiday Inn of China. They own and operate simple business hotels across China, and are aiming to quadruple the number of properties they run in the next few years. This is often talked about (along with Ctrip) as a major beneficiary of the Olympics next year, and of general increases in domestic and international tourism and business travel in the Middle Kingdom.

But it’s also Oh My God expensive, and it can be hard to wrap your head around a PE of 170 for a company that has nothing to do with the Internet or nanotechnology or anything cool like that. Just plain ‘ol hotel rooms.

Though plain ‘ol hotel rooms, with internet access and clean sheets and a consistent level of service, are not exactly legion in China at the moment, I’m sure. So they may have the same opportunity to revolutionize the sector just as domestic travel heats up with the growth of the Chinese middle class. HMIN does have the same founder as Ctrip, who undoubtedly looked at all those folks booking travel and thought, “wouldn’t it be nice if they had a decent place to stay, no matter where they go in China?” And maybe this will be the next Howard Johnson, or perhaps Neil Shen and James Liang will be the next Howard Johnson (was that really a person?), J.W. Marriott, or Kemmons Wilson.

That last one you can look up for extra credit.

I’ve been put off by the valuation for HMIN ever since the IPO, but it’s certainly true that it looks a lot better here at $27 than it did up at $48 or so at its high over the Winter. I don’t know what brought the shares down, but at these lofty valuations it doesn’t take much. I love the business, but don’t know enough about the competition, and I’m scared of the valuation. If you’ve got something to share about this one, please feel free.

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August 11, 2007 8:17 pm

What brought the stock down may be the 25% across the board Enterprise tax the PRC passed that will take affect in Jan of 2008. Just in time to tax the huge cash flow increase sure to be generated by the 2008 Olympics. Occupancy rates should be 100% in Beijing and nearby cities. Still 25% from almost zip is a tough nut to crack. There financials state they do not yet know the impact and it may result in a charge against earnings in 2007. Question is when will it show up? Also the appreciation of the RMB (Yuan) against the dollar will have a negative impact for any assets needing to be converted for reporting purposes. It will be interesting to see if the analysts factored this into their earnings forecast. Expect the earnings quarter just after the Olympic games to be outstanding. It will probably be the best quarter ever and a great time to be in the stock. I would probably want out before the following quarter and maybe even purchase some Puts at that time.

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May 12, 2008 2:38 am

I have stayed at these “7-11-ish” convenience hotels in China. They are found in all Tier-2 cities and in Shanghai/Beijing, there are up to 20 outlets for each chain.

Competition-wise, this is a low-entry industry with many players including Motel168,Greentree Inn,Super8,JingJiang Inn just to name a few, normally clustered around transport hubs in each city. There are a couple of these hotels just beside Shanghai Pudong airport.

So it boils down to efficient execution and pure volume … assuming escalating China property prices do not junk the whole equation.

Interesting interview from owner of one of these chains – http://www.998.com/websiteui/en/news/other/a38.htm

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