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Thursday, October 26, 2006

Hot IPO Alert: Home Inns & Hotels Management (HMIN)

Home Inns & Hotels Management (HMIN) priced its 7.9 milion share IPO at $13.80 per share. That is actually the same number of shares, but the pricing was well above the $10 to $12 range. There were prior indications of a higher price and higher number of shares, but it is always easier to sell the same number of shares at a higher price than it is to bump up the share count. Credit Suisse and Merrill Lynch are the lead underwriters and Deutsche Bank was a listed co-manager.

Home Inns was founded in 2002 and began opening economy class hotels in 2003. As of the filing date it had or expected to have approximately 82 hotels, 63 leased and self managed and another 19 franchised. The leased and self managed hotels account for roughly 97-98% of revenues. It has contracts for some 57 more units in the next year. Some 24 of those will be franchised, but it makes you wonder if they aren't better off doing the lease and self-manage route. It takes an upfront fee for a franchise plus 5%-6% of the sales at each franchise for the branding and the networking of the reservations and support systems. The franchise units sound a lot like Best Western here on a much smaller scale, but maybe that isn't fair.

You can click for a mapping of its hotel locations here.

The company isn't without risk. It has been sacrificing profits and cashflow for growth, and with all the rapid construction in China you could imagine a myriad of issues that could delay its growth plans and cause financial impacts. SARS and bird flu scares could always come back up in China, or whatever the next pandemic scare happens to be. They could have power issues, building material shortages, building permit delays, accidents, and the like. They are also unproven as a long-term operating company and it isn't known how well their reservation and support network is running. There is also the factthat since it leases rather than owns that they will have to suddenly have to choke up substantially higher rent costs down the road that could have the same effect as a fuel hedge expiring or a large balloon note coming due that wipes out all of a company's cash. Outside of that, the deal had no troubles selling.

The company has been growing rapidly rather than focusing on profitability. The niche is right, and the formula sounds right. Now it is just up to the company to demonstrate that they can be profitable. This is the first IPO of its kind, and if this goes well you could see many more smaller hotel chains in China (or India for that matter) try to conduct and IPO as well. It will not be that surprising at all if this IPO trades even higher out of the chute since the share count wasn't boosted. The company has an English website here.

Jon C. Ogg
October 26, 2006

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