Tuesday, February 21, 2012

Home Inns & Hotels is soaring right now

So far, the summer has treated us pretty well. But, this summer ride isn’t going to be free of a few bumps — such as we felt this week after economic data from the U.S. and China.
On Tuesday, the Federal Reserve tempered its forecast for U.S. economic growth in the second half of the year. The tepid forecast helped send stocks lower on Tuesday, and that selling accelerated today. And in China we saw reports of a slowdown in factory output for July. In fact, it was the fifth month of factory output slowing, with a gain of +13.4% over the previous year. China’s retail sales and investment in factories and other fixed assets also slowed.
The slowdown in the U.S. and Chinese economies did put some selling pressure on stocks — but I think we should see the pressure ease off soon. The fundamentals remain positive, and we are seeing tremendous growth in other Asian emerging markets.
I want to repeat what I’ve been saying for awhile now regarding China’s economic growth. First off, we should expect to see some slowing in metrics like factory output. That slowing is a direct result of the government’s active moves to keep the economy from overheating. Essentially, this is exactly what China wants.
I’m actually encouraged by the factory output numbers, because along with a decline in GDP from +11.9% in the first three months of the year to +10.3% in the second quarter, it translates into much more sustainable economic growth going forward. This stable growth is what we need to keep our select China and Asia companies outpacing the market.
So, we have definite reason to believe that China stocks will continue to outperform the broad U.S. stock market as it stays in a sideways trading range. I expect to see U.S. stocks stuck in a narrow trading range — with the S&P 500 index trading between 1,050 and 1,150 for the rest of the month.
In this scenario, investors shoul! d buy on dips to position themselves for rallies. At current market levels, with the S&P 500 approaching the lower end of my expected trading range, I would start putting more cash to work.
Already, we’ve seen some incredible outperformance from several of my Asia Edge portfolio companies. And here��s one of my favorite right now: Home Inns & Hotels Management (NASDAQ: HMIN). The stock is up 21% so far on the year and is one of my Top Buys.
When it comes to finding a company hitting its earnings stride, Home Inns is a case study. Last week the company reported outstanding financial results for the second quarter, with substantial gains in every metric.
Total revenues in the second quarter increased 25.7% year over year to RMB 806.9 million (US$119.0 million), a number at the higher end of the firm’s previous guidance range of RMB 790 million to RMB 810 million. And the company’s net income for the quarter was RMB 135.8 million (US$20 million). That number far exceeded the RMB 100.4 million (US$14.7 million) in net income the company posted in the second quarter of 2009.
Home Inn’s non-GAAP adjusted EBITDA for the second quarter was RMB 274.2 million (US$40.4 million) compared to RMB 149.0 million (US$21.8 million) in the same quarter last year. That adds up to a year-over-year increase of 84%!
The hotel chain really hit the mark in the second quarter, reporting an incredible occupancy rate that exceeded 96%, and keep in mind that that high occupancy rate took place even with price increases at many of Home Inn’s mature properties. According to CEO David Sun, “The performance of our entire network improved both year over year and sequentially across all key measures, and our Shanghai-based hotels brought in a better-than-expected premium from the Shanghai World Expo.”
Having seen firsthand how many Chinese tourists — as well as world tourists — traveled to attend the World Expo, I suspected ! Home Inn would be a big beneficiary. Well, according to the company’s latest financial results, my suspicion was dead on. As long as China continues to make headway economically, I anticipate more gains for this growing hotel chain. Buy HMIN on dips below $40. Though shares are above that level right now, a volatile market could push share prices down in the next week or two and provide you a great buying opportunity.
As of this writing, Robert Hsu was recommending HMIN to subscribers of his Asia Edge newsletter.
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