Home Inns Group Reports Second Quarter 2012 Financial Results

Home Inns & Hotels Management Inc. (NASDAQ: HMIN) (“Home Inns Group” or “the Company”), a leading economy hotel chain in China, today announced its unaudited financial results for the second quarter ended June 30, 2012.

Home Inns Group has acquired Motel 168 and consolidated Motel 168’s operating and financial results since October 1, 2011. Consolidated group numbers are presented in this earnings release unless specifically mentioned. For the purpose of providing more context and comprehensive information to investors, Home Inns Group separately presents key financial data excluding Motel 168 in this earnings release in Appendix 1.

Key Highlights for Second Quarter 2012

Financial Highlights

Total revenues increased 60.2% year over year to RMB 1.45 billion (US$228.2 million), in line with previously provided expectations for total revenues of RMB 1.43 billion to RMB 1.46 billion.

Income from operations was RMB 120.4 million (US$19.0 million). Adjusted income from operations (non-GAAP) was RMB 170.4 million (US$26.8 million), compared to RMB 158.8 million in the same period of 2011.

Net income attributable to Home Inns Group’s shareholders was RMB 36.4 million (US$5.7 million), including a net loss of RMB 19.3 million (US$3.0 million) from Motel 168, compared to net income attributable to Home Inns Group’s shareholders of RMB 122.1 million in the second quarter of 2011. Adjusted net income attributable to Home Inns Group’s shareholders (non-GAAP) was RMB 108.5 million (US$17.1 million), including adjusted net income (non-GAAP) of RMB 8.2 million (US$1.3 million) from Motel 168, compared to adjusted net income attributable to Home Inns Group’s shareholders (non-GAAP) of RMB 119.2 million in the same period of 2011.

EBITDA(non-GAAP) was RMB 284.8 million (US$44.8 million), compared to RMB 250.4 million in the same period of 2011. Adjusted EBITDA (non-GAAP) increased to RMB 331.6 million (US$52.2 million) from RMB 247.5 million in the second quarter of 2011.

Diluted earnings per ADS were RMB 0.75 (US$0.12); adjusted diluted earnings per ADS (non-GAAP) were RMB 2.17 (US$0.34).

Operational Highlights

During the second quarter of 2012, Home Inns Group opened 103 new hotels, including 32 new leased-and-operated hotels and 71 new franchised-and-managed hotels (including six new franchised-and-managed Motel 168 hotels). One leased-and-operated hotel and one franchised-and-managed hotel (Motel 168 hotel) were closed upon expiration of the contracts.

As of June 30, 2012, Home Inns Group operated across 233 cities in China with a total of 1,580 hotels, of which 733 were leased-and-operated hotels (including three Yitel hotels and 144 Motel 168 hotels) and 847 were franchised-and-managed hotels (including one Yitel hotel and 172 Motel 168 hotels). The average number of guest rooms per hotel was 122.

Home Inns Group had another 247 hotels contracted or under construction as of June 30, 2012, of which 75 were leased-and-operated hotels (including three hotels under the Yitel brand and eight hotels under the Motel 168 brand) and 172 were franchised-and-managed hotels (including 23 hotels under the Motel 168 brand).

As of June 30, 2012, Home Inns Group had a total of 9.2 million unique active non-corporate members.

The occupancy rate for all hotels in operation was 89.2% in the second quarter of 2012, compared to an occupancy rate of 94.0% in the second quarter of 2011 and 80.7% in the first quarter of 2012. The decrease in occupancy rate year over year was mainly due to overall market softness and the lower occupancy rate of the Motel 168 brand, which is still being integrated. The sequential increase in occupancy rate was mainly attributable to seasonality. The occupancy rate for Motel 168 in the second quarter of 2012 was 80.8%, increased from 74.6% in the second quarter of 2011 and increased from 70.4% in the first quarter of 2012. Integration efforts continue to benefit operational improvements.

RevPAR, which is revenue per available room, was RMB 149 for the second quarter of 2012, compared with RMB 163 in the same period of 2011 and RMB 132 in the first quarter of 2012. The year-over-year RevPAR decrease was mainly due to the lower occupancy rate described above as well as the impact of the lower average daily rate at Motel 168. The sequential increase in RevPAR was primarily attributable to seasonality. The RevPAR for Motel 168 in the second quarter of 2012 was RMB 129, an increase from RMB 111 in the first quarter of 2012.

“Despite the softened macroeconomic environment, we delivered solid year-over-year revenue growth during the second quarter, putting us in the higher end of previously stated revenue expectations,” said Mr. David Sun, the Company’s chief executive officer. “Our mature hotels excluding Motel 168 hotels maintained RevPAR year-over-year and delivered stable revenue performance, our three Yitel Hotels opened last year are ramping up according to expectations, and the Company continues to benefit from economies of scale. While Motel 168 hotels experienced stronger-than-expected headwinds due to their concentrated exposure to regions more adversely impacted by the macroeconomic environment, including areas surrounding the Yangtze River Delta, integration efforts continued to net positive improvement results.”

“As we move into the second half of 2012, we will continue to further our multi-brand development and integration, keep cost increases in check and improve operating efficiencies across the Company. Motel 168 integration is expected to be more results-driven after the initial foundational efforts and resource investments. We believe that our franchise business growth will continue its strong momentum leveraging a well-run franchise business platform and increasing brand value and recognition. We are confident in the long-term prospects of China’s travel and lodging industry and we have strategically positioned ourselves to capitalize on such opportunities and to achieve profitable growth in the future.”

Detailed Overview of Financial Results for Second Quarter 2012

Total Revenues for the second quarter of 2012 increased 60.2% year over year to RMB 1.45 billion (US$228.2 million), including revenues from Motel 168 of RMB 377.4 million (US$59.4 million). Motel 168 revenues fell short of its previous revenue guidance for the second quarter. While integration is largely on track, Motel 168 performance improvements were dampened by worse-than-expected market conditions in the Yangtze Delta region where the majority of Motel 168 hotels are located. Proactive restructuring of Motel 168’s food and beverage operations continued with reduced revenues and elimination of associated costs.

Total revenues from leased-and-operated hotels for the second quarter of 2012 were RMB 1.30 billion (US$204.7 million), representing a 60.7% increase year over year and a 15.3% increase sequentially.

Total revenues from franchised-and-managed hotels for the second quarter of 2012 were RMB 149.7 million (US$23.6 million), representing a 55.9% increase year over year and a 17.1% increase sequentially.

Total Operating Costs and Expenses for the second quarter of 2012 were RMB 1.24 billion (US$195.9 million). Excluding any share-based compensation expenses and integration cost, total operating costs and expenses (non-GAAP) for the quarter were RMB 1.19 billion (US$188.1 million), representing 82.4% of total revenues, compared with 76.0% for the same quarter a year ago and 93.2% for the first quarter of 2012.

Total leased-and-operated hotel costs for the second quarter of 2012 were RMB 1.12 billion (US$176.7 million), including share-based compensation expenses of RMB 2.2 million (US$0.3 million) and integration costs of RMB 23.9 million (US$3.8 million). Total leased-and-operated hotel costs excluding share-based compensation expenses and integration costs (non-GAAP) for the second quarter of 2012 were RMB 1.10 billion (US$172.6 million), representing 84.3% of the leased-and-operated hotel revenues, compared to 77.5% of leased-and-operated hotel revenues in the same period of 2011 and 95.8% in the first quarter of 2012. This year-over-year increase in this expense ratio was mainly driven by overall soft market conditions not suitable for systematic price increases, higher cost ratio from Motel 168 hotels which are still being integrated, and increase in personnel costs net of cost control initiatives. The sequential decrease in this ratio was mainly driven by seasonality. The pre-opening cost was RMB 28.8 million (US$4.5 million) in the second quarter of 2012 compared to RMB 26.9 million in the second quarter of 2011. Upon market conditions returning to normal, Motel 168 further achieving integration results and recently-implemented cost control initiatives generating benefits, the Company expects the cost ratio to improve and consequently stabilize and increase profitability of the Company.

Personnel costs of franchised-and-managed hotels for the second quarter of 2012 were RMB 32.8 million (US$5.2 million), including share-based compensation expenses of RMB 2.5 million (US$0.4 million). Excluding share-based compensation expenses, personnel costs of franchised-and-managed hotels (non-GAAP) for the second quarter of 2012 were RMB 30.3 million (US$4.8 million), representing 20.2% of franchised-and-managed hotel revenues. This compared to 17.0% for the same quarter in 2011 and 16.0% for the first quarter of 2012. The year-over-year increase in this ratio was mainly due to the impact of Motel 168, as the revenue from franchised-and-managed hotels at Motel 168 was relatively low. The sequential increase in this ratio was mainly due to the alignment of labor cost structures across different brands, including implementing performance-based bonuses at Motel 168.

Sales and marketing expenses for the second quarter of 2012 were RMB 15.6 million (US$2.4 million), including share-based compensation expenses of RMB 0.4 million (US$0.1 million). Excluding share-based compensation expenses and integration cost, sales and marketing expenses (non-GAAP) for the second quarter of 2012 were RMB 15.1 million (US$2.4 million), representing 1.0% of total revenues, compared to 1.4% of total revenues in the first period of 2012.

General and administrative expenses for the second quarter of 2012 were RMB 74.0 million (US$11.6 million), including share-based compensation expenses of RMB 19.6 million (US$3.1 million) and integration costs of RMB 1.3 million (US$0.2 million). General and administrative expenses excluding share-based compensation expenses and integration cost(non-GAAP) were RMB 53.1 million (US$8.4 million), or 3.7% of the total revenues, compared with 5.1% of the total revenues in the same period of 2011 and 4.2% in the first quarter of 2012. The Company continues to benefit from economies of scale.

Income from Operations for the second quarter of 2012 was RMB 120.4 million (US$19.0 million). Income from operations excluding share-based compensation expenses and integration cost (non-GAAP) for the second quarter of 2012 was RMB 170.4 million (US$26.8 million), or 11.8% of total revenues, compared to RMB 158.8 million, or 17.5% of total revenues, in the same period of 2011 and RMB 9.7 million, or 0.8% of total revenues, in the first quarter of 2012. The year-over-year decrease in the ratio of income from operations excluding share-based compensation expenses and integration cost (non-GAAP) over total revenues was mainly caused by the higher cost ratio at Motel 168 and an increase in personnel costs, while relatively soft market conditions were not conducive to systematic selling price increase which would otherwise offset cost inflation. The sequential increase in this ratio was mainly due to seasonality.

EBITDA (non-GAAP) for the second quarter of 2012 was RMB 284.8 million (US$44.8 million). Excluding any share-based compensation expenses, foreign exchange loss, acquisition expenses, integration cost, gain on buy-back of convertible bonds, gain on fair value change of convertible notes and non-operating income, adjusted EBITDA (non-GAAP) was RMB 331.6 million (US$52.2 million), or 22.9% of total revenues, compared to RMB 247.5 million, or 27.3% of total revenues, in the same period in 2011 and RMB 165.9 million, or 13.2% of total revenues, in the first quarter of 2012. Integration cost refers to costs incurred by Motel 168 during its integration into the Company’s business.

Consolidated Net Income Attributable to Home Inns Group’s Shareholders for the second quarter of 2012 was RMB 36.4 million (US$5.7 million). Adjusted net income attributable to Home Inns Group’s shareholders (non-GAAP), which excludes any share-based compensation expenses, foreign exchange loss, acquisition expenses, integration cost, upfront fee amortization of term loan, gain on buy-back of convertible bonds, gain on fair value change of convertible notes and non-operating income, was RMB 108.5 million (US$17.1 million) for the second quarter of 2012, compared to adjusted net income (non-GAAP) of RMB 119.2 million in the same period of 2011 and adjusted net loss (non-GAAP) of RMB 24.6 million in the first quarter of 2012.

Basic and Diluted Earnings Per Ordinary Share and Per ADS for the second quarter of 2012: Basic earnings per share was RMB 0.40 (US$0.06), while diluted earnings per share was RMB 0.37 (US$0.06). Basic earnings per ADS were RMB 0.80 (US$0.13), while diluted earnings per ADS were RMB 0.75 (US$0.12). Excluding any share-based compensation expenses, foreign exchange loss, integration cost, upfront fee amortization of term loan, gain on fair value change of convertible notes and non-operating incomes, adjusted basic earnings per share (non-GAAP) were RMB 1.20 (US$0.19), while adjusted diluted earnings per share (non-GAAP) were RMB 1.08 (US$0.17). Adjusted basic earnings per ADS (non-GAAP) were RMB 2.39 (US$0.38), while adjusted diluted earnings per ADS were RMB 2.17 (US$0.34).

Cash Flow

Net operating cash flow for the second quarter of 2012 was RMB 259.3 million (US$40.8 million), compared to RMB 254.3 million from the second quarter of 2011. Capitalized expenditures for the second quarter of 2012 were RMB 224.5 million (US$35.3 million), while related cash paid for capital expenditures during the quarter was RMB 134.5 million (US$21.2 million).

Balance Sheet

As of June 30, 2012, the Company had cash and cash equivalents of RMB 1.01 billion (US$158.6 million). The outstanding balance of convertible bonds (issued in 2007) was RMB 113.3 million (US$17.8 million) including principal and accrued interest. Outstanding balance of long-term financial liability (measured at fair value) arose from the convertible notes issued in December 2010 was RMB 997.7 million (US$157.0 million). The balance of US Dollar-denominated four-year term loan facility decreased to RMB 917.1 million (US$144.4 million), as the Company paid down US$95 million during the second quarter of 2012.

Outlook for the Full Year and Third Quarter of 2012

Taking into consideration of Motel 168’s current performance trend in light of prevailing market conditions, the Company is revising its full year revenue guidance for Motel 168. Revenue guidance for the full year excluding Motel 168 remains unchanged.

Revised revenue guidance for full year 2012:

Total revenues for Home Inns Group for 2012 are expected to be in the range of RMB 5,715 million (US$899.6 million) to RMB 5,810 million (US$914.5 million). Previously guided total revenues for Home Inns Group were in the range of RMB 5,815 million to RMB 5,910 million.

Total revenues for the Motel 168 brand for the full year of 2012 are expected to be in the range of RMB 1,475 million (US$232.2 million) to RMB 1,500 million (US$236.1 million). Previously guided total revenues for Motel 168 were in the range of RMB 1,575 million to RMB 1,600 million.

Excluding Motel 168, total revenues for the full year of 2012 remains unchanged to be in the range of RMB 4,240 million (US$667.4 million) to RMB 4,310 million (US$678.4 million).

Revenue guidance for the third quarter of 2012:

The Home Inns Group expects its total revenues in the third quarter of 2012 to be in the range of RMB 1,545 million (US$243.2 million) to RMB 1,575 million (US$248.0 million).

Total revenues for the Motel 168 brand in the third quarter of 2012 are expected to be in the range of RMB 390 million (US$61.4 million) to RMB 400 million (US$63.0 million).

Excluding Motel 168, total revenues in the third quarter of 2012 are expected to be in the range of RMB 1,155 million (US$181.8 million) to RMB 1,175 million (US$185.0 million).

This forecast reflects Home Inns Group’s current and preliminary view, which is subject to change.

This announcement contains translations of certain RMB amounts into U.S. dollars solely for the convenience of the reader. Unless otherwise noted, all translations from RMB to U.S. dollars are made at a rate of RMB6.3530 to US$1.00, the noon buying rate for June 29, 2012 set forth in the H.10 statistical release of the Federal Reserve Board.

Conference Call Information

Management will hold an earnings conference call at 9:00 PM U.S. Eastern Daylight Time on August 9, 2012 (9:00 AM Beijing/Hong Kong Time on August 10, 2012).

Dial-in details for the earnings conference call are as follows:

A replay of the conference call may be accessed by phone at the following numbers until the end of?August 17, 2012?U.S. Eastern Daylight Time.

Live and archived webcasts of this conference call will be available at?http://english.homeinns.com.

Source: Home Inns & Hotels Management Inc.