Home Inns Group Reports Fourth Quarter Total Revenues Increased 11.9%

Home Inns & Hotels Management Inc. (NASDAQ: HMIN), a leading economy hotel chain in China, today announced its unaudited financial results for the fourth quarter and full year ended December 31, 2012.

Home Inns Group acquired Motel 168 and has consolidated Motel 168's operating and financial results since October 1, 2011. Consolidated group numbers are presented in this earnings release unless specifically noted. 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.

Fourth Quarter and Full Year 2012 Financial Highlights

• Total revenues increased 11.9% to RMB 1.47 billion for the fourth quarter of 2012 and increased 45.7% to RMB 5.770 billion for the full year 2012, which was within the higher end of the guidance range of RMB 5.715 billion to RMB 5.810 billion.
• Adjusted EBITDA (non-GAAP) increased 14.6% to RMB 260.5 million (US$41.8 million) for the fourth quarter of 2012 and increased 25.9% to RMB 1.13 billion (US$181.9 million) for the full year 2012 

Fourth Quarter and Full Year 2012 Operational Highlights

• Home Inns Group opened 366 new hotels in 2012, exceeding the guidance range of 330 to 360. As of December 31, 2012, the Group operated 1,772 hotels across 253 cities in China under its three brands. There were a total of 241 hotels contracted or under construction at the end of 2012 including 170 franchised-and-managed hotels representing a strong pipe-line for this business model.

• As of December 31, 2012, Home Inns Group had a total of 11.9 million unique active non-corporate members under its frequent guests programs.

Operating Metrics

• The year-over-year decrease in RevPAR was mainly driven by continued market softness across China despite signs of improvements in certain macroeconomic indicators. In addition, relatively weaker economic conditions in lower tier cities further hindered hotels' normal ramp up progress towards maturity. This short-term set back does not change the Company's conviction in its strategic positioning in lower tier cities where long term growth prospects exist.
• The year-over-year decrease in RevPAR for the full year of 2012 was also attributable to the full year dilutive impact from Motel 168 in 2012 with a lower overall RevPAR than the core organic business as integration continues.
• Benefiting from continued integration efforts, both occupancy rate and ADR for Motel 168 for the fourth quarter of 2012 improved, to 77.4% and RMB 160 from 73.5% and RMB 154, respectively, resulting in a 9.7% improvements year-over-year in fourth quarter RevPAR to reach RMB 124 from RMB 113 a year ago. RevPAR for Motel 168 for the full year of 2012 was RMB 125. The integration of Motel 168 remains on track and further improvements in RevPAR are expected in 2013 as the integration proceeds in final stages.

"Given sustained market challenges and increasing competition, we are reasonably pleased with our overall performance," said Mr. David Sun, the Company's chief executive officer. "We met our annual revenue expectations and exceeded our target for new hotel openings. Performance of mature hotels remained solid relative to market softness, the integration of Motel 168 continues to be on track, and we have finalized the Yitel brand design and financial blueprint."

"Our growth focus on low-capital-high-margin franchise-and-managed hotels is well supported by our strong brand, our well-run franchise programs and the increasing demand from our quality franchisee partners. We plan to conclude Motel 168 integration this year, and this second economy brand will then start to contribute positively to our bottom line. The impressive development trends of Yitel hotels in operations have proven concept and execution model, and we expect to scale up the Yitel portfolio accordingly," Mr. Sun continued. "Meaningful improvements may still be months ahead, and the Company is focused on sustainable profitable growth for the long run. We have built solid internal readiness including strong franchised-and-managed hotels growth momentum and continued cost control initiatives to take advantage of market recoveries when time comes and to capture long-term growth prospects of the Chinese economy."

Detailed Overview of Financial Results for Fourth Quarter and Full Year 2012

• Both year-over-year increases in total revenues from leased-and-operated hotels for the fourth quarter of 2012 and the full year of 2012 were mainly driven by an increase in the number of hotels in operation offsetting impact from market-driven decrease in RevPAR. The increase in the number of leased-and-operated hotels in operation for the full year was attributable in large part to acquisition of Motel 168 effective October 1, 2011.
• Both year-over-year increases in total revenues from franchised-and-managed hotels for the fourth quarter of 2012 and the full year of 2012 were mainly driven by an increase in the number of such hotels in operation. The increase in the number of franchised-and-managed hotels in operation for the full year was attributable in large part to acquisition of Motel 168 effective October 1, 2011.
• Revenues from Motel 168 included in total revenues were RMB 365.0 million (US$58.6 million) for the fourth quarter of 2012 and RMB 1.47 billion (US$235.7 million) for the full year of 2012. Revenues of Motel 168 fell slightly below its previous revenue guidance for the full year 2012 as a result of overall market weakness and significant elimination of unprofitable food and beverage business operations. Integration of Motel 168 remains on track and the Company expect to conclude the integration in 2013.

Total Operating Costs and Expenses / Total Operating Income

Total operating costs and expenses were RMB 1.34 billion (US$215.3 million) for the fourth quarter of 2012, representing 91.5% of total revenues for the quarter, and RMB 5.16 billion (US$ 828.1 million) for the full year of 2012, representing 89.4% of total revenues for the year. Total operating costs and expenses excluding any share-based compensation expenses and acquisition and integration costs, (non-GAAP) for the fourth quarter of 2012 were 88.6% of total revenues, compared to 87.8% in the same period a year ago, and 86.1% for the full year of 2012 compared to 82.2% for the full year of 2011.

Both year-over-year increases in total operating costs and expenses as a percentage of total revenues for the fourth quarter and the full year of 2012 were mainly due to overall soft market conditions, lack of systematic price increases and rising operating costs net of productivity benefits from general and administrative cost. The increase in this ratio for the full year was also due to a higher cost ratio from Motel 168 with one quarter of results consolidated in 2011 compared to four quarters of results consolidated in 2012.

• Total leased-and-operated hotel costs were RMB 1.21 billion (US$194.0 million) for the fourth quarter of 2012 and RMB 4.64 billion (US$745.1 million) for the full year of 2012. Total leased-and-operated hotel costs excluding any share-based compensation expenses and acquisition and integration costs (non-GAAP) were 91.0% of the leased-and-operated hotel revenue in the fourth quarter of 2012 compared to 88.9% in the same period a year ago, and 88.1% for the full year of 2012 compared to 82.7% for the full year of 2011. The year-over-year increases in this expense ratio were mainly due to weaker revenue base driven by market softness, the absence of systematic price increases, and rising operating costs including energy costs and personnel costs not fully absorbed by productivity initiatives. The year-over-year increase in this expense ratio for the full year was also driven by a higher cost ratio from Motel 168 hotels whose results were consolidated starting fourth quarter of 2011.

  Pre-opening cost was RMB 26.8 million (US$4.3 million) for the fourth quarter of 2012 and RMB 104.2 million (US$16.7 million) for the full year of 2012.

• Personnel costs of franchised-and-managed hotels were RMB 24.6 million (US$3.9 million) for the fourth quarter of 2012 and RMB 125.0 million (US$20.1 million) for the full year of 2012. Personnel costs of franchised-and-managed hotels excluding share-based compensation expenses (non-GAAP) were 13.8% of franchised-and-managed hotel revenues in the fourth quarter of 2012, compared to 14.3% in the same period of 2011, and 19.1% for the full year of 2012 compared to 17.2% for the full year of 2011. The decrease in this expense ratio in the fourth quarter of 2012 was due to one-time adjustment in the fourth quarter of 2012. The year-over-year increase in this ratio was mainly due to relatively lower revenue performance by franchised-and-managed hotels at Motel 168 whose results were consolidated for the full year of 2012 and only the fourth quarter for the full year of 2011.
• Sales and marketing expenses were RMB 24.8 million (US$4.0 million) for the fourth quarter of 2012, and 76.9 million (US$12.3 million) for the full year of 2012. Sales and marketing expenses excluding share-based compensation expenses (non-GAAP) were 1.7% of total revenues for the fourth of quarter 2012 compared to 1.5% in the same period of 2011, and 1.3% of total revenues for the full year of 2012 compared to 1.1% of total revenues in 2011. The year-over-year increase in this sales and marketing expenses as a percentage of total revenues for the fourth quarter was mainly due to non-recurring spending on marketing programs in the fourth quarter in support of Home Inns Group's multi-brand strategy. The sales and marketing expense ratio was 1.3% in the full year of 2011 after taking into consideration of the one-time catch-up adjustment resulted from the adoption of an estimated redemption rate for customer rewards during 2011. The Company continued to rely largely on basic and cost-effective sales and market practices in supporting its revenue growth.
• General and administrative expenses were RMB 83.4 million (US$13.4 million) for the fourth quarter of 2012, and RMB 315.2 million (US$50.6 million) for the full year of 2012. General and administrative expenses excluding any share-based compensation expenses, acquisition and integration costs (non-GAAP) were 4.5% of total revenues for the quarter compared to 4.7% in the same period of 2012, and 4.0% of total revenue for the full year of 2012 compared to 5.0% for the full year of 2011. Both year-over-year decreases in general and administrative expenses as a percentage of total revenues in the fourth quarter and full year 2012 came as a result of effective cost control and productivity enhancements. The Company continued to benefit from cost discipline and economies of scale.

Income from Operations was RMB 36.3 million (US$5.8 million) for the fourth quarter of 2012 and RMB 273.7 million (US$43.9 million) for the full year of 2012. Income from operations excluding share-based compensation expenses and integration cost (non-GAAP) for the fourth quarter of 2012 was RMB 79.2 million (US$12.7 million), or 5.4% of total revenues, compared to RMB 78.5 million, or 6.0% of total revenues, in the same period of 2011. Income from operations excluding share-based compensation expenses and integration cost (non-GAAP) for 2012 was RMB 464.1 million (US$74.5 million), or 8.0% of total revenues, compared to RMB 457.3 million, or 11.5% of total revenues, in 2011.

The year-over-year decrease in income from operations as a percentage of total revenue for the fourth quarter of 2012 and full year of 2012 was mainly due to weaker operating environment, and the absence of systematic price increases to offset rising hotel operating costs including utilities and personnel related costs. Consolidation of Motel 168 for the full year of 2012 with higher cost ratio as the business was still in the process of integration also contributed to the year over year decrease in the income ratio.

Provided that the market condition improves in the future, the Company is prepared to improve profitability through pricing, higher-mix of margin-rich franchise-and-managed hotels expansion focus, further productivity gains and headquarter costs leverage.

Cash Flow

Net operating cash flow for the fourth quarter of 2012 was RMB 186.8 million (US$30.0 million), compared to RMB 139.5 millionin the same period of 2011. Capitalized expenditures for the fourth quarter of 2012 were RMB 250.4 million (US$40.2 million), while related cash paid for capital expenditures during the quarter was RMB 305.6 million (US$49.0 million).

For the full year 2012, net operating cash flow was RMB 716.9 million (US$115.1 million), compared to RMB 726.1 million in 2011. Capitalized expenditures for 2012 were RMB 1.00 billion (US$160.9 million), while related cash paid for capital expenditures during the year was RMB 958.1 million (US$153.8 million).

Balance Sheet

As of December 31, 2012, Home Inns Group had cash and cash equivalents of RMB 663.2 million (US$106.4 million). Financial liabilities of RMB 1.07 billion (US$171.2 million) consisted of the outstanding balance of long-term financial liability for convertible notes (issued in December 2010) and interest swap contracts (both measured at fair value). The balance of the Company's U.S. dollar-denominated four-year term loan facility was RMB 748.0 million (US$120.1 million). The Company redeemed the outstanding convertible bonds issued in 2007 in the fourth quarter of 2012.

The Company plans to execute its future expansions with more franchised-and-managed hotels which do not require capital investments. The number of new lease-and-operated hotels openings will be reduced accordingly. With a strong underlying cash-generative hotel operations, the Company expects to improve its cash position in the near future.

Outlook for First Quarter and Full Year 2013

Home Inns Group targets to open 360 to 380 new hotels in 2013, including approximately 80 to 90 leased-and-operated hotels and 270 to 300 franchised-and-managed hotels.

Home Inns Group expects total revenues for the group for 2013 to be in the range of RMB 6,600 million (US$1,059.4 million) to RMB 6,800 million (US$1,091.5 million), representing a growth of 14.4% to 17.9% over 2012. Total revenues for the group in the first quarter of 2013 are expected to be in the range of RMB 1,385 million (US$222.3 million) to RMB 1,415 million (US$227.1 million).

Total revenues for Motel 168 brand for 2013 are expected to be in the range of RMB 1,650 million (US$264.8 million) to RMB 1,700 million (US$272.9 million). Total revenues for Motel 168 brand in the first quarter of 2013 are expected to be in the range of RMB 330 million (US$53.0 million) to RMB 340 million (US$54.6 million).

Excluding Motel 168, total revenues for 2013 are expected to be in the range of RMB 4,950 million (US$794.5 million) to RMB 5,100 million (US$818.6 million). Excluding Motel 168, total revenues in the first quarter of 2013 are expected to be in the range of RMB 1,055 million (US$169.3 million) to RMB 1,075 million (US$172.5 million).

These forecasts reflect the Company's current and preliminary view, which are 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 RMB 6.2301 to US$1.00, the noon buying rate for December 31, 2012 set forth in the H.10 statistical release of the Federal Reserve Board.

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