Why have the ADRs (American Depositary Receipts) of Home Inns and Hotels Management
) been in such a slump? (Home Inns and Hotels is a member of my Jubak's Picks portfolio
The ADRs have plunged from $31.92 on March 2 to $20.19 on June 4 before rallying to $22.66 on June 29. They now are in retreat again, closing Friday at $17.
Mark it down to a fear of growth without profits in China's slumping economy in general and in the budget hotel sector in particular.
On May 11, Home Inns and Hotels reported first-quarter results that showed a huge 66% year-over-year increase in revenue to $199.4 million, well above the $177.6 million consensus estimate on Wall Street. (If you take out the effects the Motel 168 acquisition, revenue was up 22.7% year over year.) For the second quarter, scheduled to be reported on August 9, the company raised revenue guidance to $277 million to $232 million versus the Wall Street consensus of $209.5 million.
That's all about revenue, however. The company reported a loss of 9 cents a share, 5 cents worse than Wall Street expectations.
See the potential problem? Management clearly knows how to grow revenue, but can it increase earnings?
If you had that worry, it only got worse on July 1 when Home Inns and Hotels reported that it had finished the acquisition of eJia Express, a regional economy chain in Anhui Province, for $9.4 million in cash. The 13 acquired eJia Express hotels will be rebranded and added to the 32 the company already operates in Anhui Province. The earlier acquisition of the much bigger Motel 168 chain had already pushed the company’s hotel count to 1,479 at the end of the first quarter with another 218, then, under construction.
Is this a case of revenue "acquisition" run amuck with the consequent destruction of margins, earnings, and shareholder value? Or is this actually the case of a company buying up smaller competitors in a consolidating sector when the economy is weak in preparation for an eventual economic turn?
If you look at the important metrics for the hotel industry the answer is comforting. Amidst all this acquisition, Home Inns and Hotels is keeping occupancy rates and RevPAR (revenue per available room) within shouting distance of where these metrics stood in a stronger Chinese economy.
So, for example, excluding the newly acquired and still being rebranded and refurbished Motel 168 hotels, occupancy in the first quarter was 84.4%. That’s only down slightly from 85.1% in the first quarter of 2011 and down slightly more from the fourth quarter of 2011 when occupancy was 88.4%.
RevPAR, again excluding Motel 168, was also down at $139 from the first quarter of 2011 ($140) and from the fourth quarter of 2011 ($141) but not worryingly, to me anyway, so.
I think my target price for these ADRs deserves a trim in recognition of the slowdown in China's economy. That slowdown looks likely to bottom in the third quarter of 2012, a quarter later than I had projected. So as of July 20 I'm cutting my previous target of $39 by December to $32 by March 2013.
At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Home Inns and Hotels as of the end of March. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here.