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Time To Check Into Home Inns

Posted: Oct 29, 2007 07:52 AM by Glenn Curtis

Tickers in this Article: C, HMIN

There are many ways for investors to take advantage of the burgeoning Chinese economy. I think that one of the most attractive ways is to buy shares of Shanghai-based Home Inns & Hotels Management (Nasdaq:HMIN).

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Its Q2 numbers were astounding - revenue was up 67.8%, EBITDA went up 17.1% and it had an occupancy rate of 95%.

Motel 6 - With Chinese Flair
Home Inns and Hotels Management is an ADR that trades on the Nasdaq. As the name suggests, the company is in the hotel business - more specifically, the budget or economy hotel business on China's mainland. The company sports some 200 locations and has been growing at a virtual breakneck pace thanks to the increasing wealth of the average Chinese citizen and a corresponding pickup in the domestic Chinese travel industry.

Reuters recently reported that the company is expanding its footprint through the acquisition of Top Star, which is an economy chain with 26 hotels. I expect to see more acquisitions of this sort going forward as the company heads toward its reported target of establishing 1,000 locations over the next few years. (To read the full article, see "China's Home Inns to buy economy hotel chain".)

Perhaps not surprisingly, investors are starting to pay attention to the stock. On October 5, Citigroup (NYSE:C) picked up coverage on the company with a 'buy' recommendation.

Earlier this year, it also picked up research coverage from research firm Brean Murray and CIBC World Markets. And going forward, thanks to the upcoming Olympics in China, and the likely publicity this will garner, I suspect that its coverage list will only increase. This could be another potential catalyst for the stock. (To learn the subtleties of 'buy, accumulate, weak hold, overweight, underweight' and all the other ratings, check out Analyst Recommendations: Do Sell Ratings Exist?)

Big Expectations, Big Risks
Wall Street is betting that the company will earn 36 cents per share this year and 72 cents next year, implying an expected growth rate of 100%. Over the next five years the Street is anticipating annual growth of about 40%.

The Chinese economy is growing, but there's no guarantee it will continue to experience the same acceleration in the coming years. In addition, it is important to note that while China is allowing the expansion of commerce, particularly in areas such as Shanghai, it is still a communist nation, and as such it will likely retain tight control over businesses within its borders.

Finally, there are always risks associated with growing at such a rapid pace. The simple fact is, if the company slips up, it might not meet its growth targets or garner additional precious Wall Street research coverage.

The Bottom Line
I think that Home Inns is a terrific play on the anticipated growth of the domestic travel business in China. While there are risks to the story, I think the company will continue to expand its footprint both organically and through acquisitions for the foreseeable future. In one year's time, I could see this stock pushing up into the $55-60 range.

For more insight into overseas investment and ADRs, see Investing Beyond Your Borders.

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By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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