An Analysis of a Chinese Hotel company

Insight views Home Inns and Hotels Management Inc. (HMIN), a Chinese hotel company, as providing broad exposure to the Chinese economy, ex exports. The Chinese economy is growing quickly, and Insight views such growth as likely to continue for many years to come. In addition, an investment in HMIN will benefit from a weak dollar, which Insight views as likely to continue. Insight conducted a market opportunity analysis for the company. The general idea was to use hotel penetration and revpar (revenue per available room) in 2009 in the US as a basis for determining the total Chinese hotel revenue opportunity. To do this it was necessary to ascertain when Chinese GDP would catch up to 2009 US GDP. Having done the above, HMIN's market share and margin could be estimated , capitalized, and then discounted back to get the present value of HMIN stock. Implicit in the analysis is the assumption that hotel usage in China 19 years from now will constitute a greater share of GDP than it does in the US now. This assumption was made based on the hugely greater Chinese population vis the US and thus what Insight believes will be greater domestic demand for leisure services in China than in the US. Insight also believes foreigners will provide significant demand for tourism China in future years, although such demand has not been quantified in the current analysis. Available data suggests that the total number of hotel rooms in the US today is about 4.7 million, and the current US GDP is about $14 trillion. It was then calculated how long it will take Chinese GSP, currently around $3.4 trillion, to get to current US GDP of $14 trillion. Chinese real GDP has averaged about 10% growth annually over the last 19 years. In the analysis this figure was haircutted and 8% average annual real GDP growth was assumed for the next 19 years, which leads to the conclusion that after 19 years Chinese GDP will be about at 2009 US GDP levels. It was then calculated what the total revenue opportunity for the Chinese hotel market will be in 19 years assuming the same proportion of hotel rooms in China as exists today in the US. The Chinese population today is about 1.3 bn, or some 4X greater than the US population. Based on this demographic analysis it was assumed that there will be about 4X more hotel rooms in China 19 years from now as there are in the US now, or some 20 mn. Since it was assumed that Chinese GDP will be in 19 years the same as US GDP today, it was assumed that in 19 years, the revpar in China will be the same as in the US today. Marriott International's recent revpar of $100 was used in Insight's calculation. The total hotel revenue opportunity in China 19 years from now was then calculated. Revpar of $100 times 360(days per year) times the projected number of hotel rooms (20 mn) =$728bn. It was assumed that HMIN will remain one of the top ten economy brands in China over the next 19 years and at that time have a 5% share of the total market, or some $36 bn. Marriott's net margin was in the 20% area in 2006, a good year, so it was assumed that HMIN would have a net margin of 15% for total net income of $5.5 bn. Let's assume the market puts a 15 PE multiple on this net income for a total market cap of $82bn. HMIN's beta is 2, and to be conservative this market cap was discounted at 15% over 19 years for a total present value of $ 5.8bn. Based on a current share price of about $35, the current market cap is about $1.4 bn. Thus by this analysis HMIN provides an opportunity for a potential 300% return. Even if it is assumed HMIN only gets a 2.5% market share it provides potential for a 100% return from here. Please note the above analysis contains several assumptions, which may not hold or come to fruition. Still, Insight views HMIN as an investment with significant potential.

Philip Frank, PhD
 President and Portfolio Manager,
Insight Asset Management LLC
insight-asset@earthlink.net

Insight Asset Management LLC is currently long Home Inns and Hotels Management Inc. (HMIN) in its model portfolio and in its client portfolios