This is part 2 of Chinese Stocks to Watch in 2007 Series.
Home Inns & Hotel Management (HMIN) is a Shanghai-based economy lodging chain that provides its guests “with the same comforts they would expect as home.” If Home Inns is true to this claim, then this stock should really soar in 2007.
Home Inns & Management Company Report
Home Inns & Hotels Management Inc. is a China-based economy hotel chain. The Company develops and operates economy hotels across China under its Home Inn brand. The Company either leases real estate properties, on which it develops and operates hotels or it franchises its brand to hotel owners or manages these hotel properties. The Company refers to the former type of hotels as leased-and-operated hotels and to the latter type of hotels as franchised-and-managed hotels. As of June 30, 2006, the Company’s Home Inns hotel chain consisted of 63 leased-and-operated hotels in operation with an additional 33 leased-and-operated hotels under development, and 19 franchised-and-managed hotels in operation with an additional 24 franchised-and-managed hotels under development, covering 40 cities in China. (Source: MSN Money)
The company recently released a $80 million IPO on the NASDAQ back in October, and the stock has been hot ever since.
I like Home Inns for a number of reasons:
1. Home Inns provides economy lodging to the fast growing Chinese middle class, a market that has unlimited potential as long as the Chinese middle class continues to grow. The Chinese are known for patronizing China-owned businesses whenever possible. Home Inns will certainly be a favorite since the company is owned and run by Chinese residents. Their loyalty to all things “Made in China” will prevent large American lodging chains from stealing all the business.
2. The Chinese stock market is red hot. The recent growth in China’s exports, 32.8% to be exact, adds a ton of money to the middle class spending power. This trend will continue to increase as China grows the Chinese import-export market, and reinvests its surplus funds in Chinese banks. When residents use their earnings towards travel, they will likely stay at Home Inns, since China’s largest source of tourism is other Chinese residents.
3. Home Inns displays a strong balance sheet. In the most recent 3rd quarter, Home Inns held $161 million in cash, accumulated $60 million in long-term debt, and increased retained earnings by 18% from last quarter. In its short life span on the NASDAQ, Home Inns has performed extremely well on a world scale.
4. Sales and income growth rates are well over 100%, while profit margins could use a bit of tweaking. I think Home Inns & Hotel Management will benefit from returning guests who enjoy affordable economy lodging within Shanghai, Beijing, and other hot tourist spots in China.
5. Home Inns has expanded rapidly over the last 3 years, growing from 10 hotels in 2003 to 107 in 2006. The company operates a mix of company owned and franchise owned hotels to maintain a healthy risk profile, and provides essential hotel amenities such as 24/7 hot water, free broadband internet access, and quality bedding accommodations all for a reasonable price.
6. The company is young. It was founded in 2002, so it’s nowhere near its growth targets. In a country as big as China, who knows exactly how many Home Inns hotels we’ll see before competition is a factor. Right now, the company can focus on operating hotels in busy city districts to maximize its profits without worrying about competitors.
When to Buy Shares
This stock has been added to my watch list officially. HMIN stock is trading near its 52-week high, and suffers from a highly inflated P/E ratio. I’m going to track this stock until shares either look undervalued or just too good to pass up. With dealing with a young company like Home Inns & Hotel Management, I’m more afraid of missing the “boat” rather than entering a position at a high price.
I can just agree to your last sentence “Im more afraid of missing the boat rather than entering a position at a high price.” This in mind I stocked up PTR. Altough not a secret tip I believe in a rising oil price and a shift from US to European and Chinese stocks.
PTR shares look cheap now, especially with that 0.41 PEG ratio.
Let us know at what price you entered your position. I like this stock a lot, and would appreciate your direct insight on the company.
Home Inns (HMIN) stock traded above $40 for the first time today Jan 3, 2007. Since its debut on Oct 26, 2006, the stock almost doubled from its first day close price (about $22.50). From traditional valuation point of view, this is a bit insane. As a stock holder I am also nervous about such a fast run. Sowhy dont we do a little PE price earning ratio analysis on this one. Lets assume it closes at $40 today. The company earned $0.12 in the first half of year 2006, 0.10 in 3rd quarter (non GAPP, exclude one time share based compensation), and lets say it will make $0.12 for the 4th quarter, which is quite reasonable. 40 divided by (0.12+0.10+0.12), and its equal to 117. This is high compared to Google, or Apple. But note the company is growing at more than 100% year over year and we can expect that trend to continue for a few years.
Note: as rule of thumb (or finger), the PE ratio should not exceed the growth rate too much. Say, for a PE 15 company, we expect it grow 15% year over year.
I noticed the high PE ratio, but that seems to be one of the problems with mid cap growth stocks. You tend to overpay for them, especially when they’re trading near 52- week highs.
Since the company has grown so quickly, I expect they will surpass 15% earnings growth next year. 2007 looks very bright for inter-China travel.
Let’s wait and see.