Soundless, s inn ivestment report 2010
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  • 1. S Inn Investment Report 2010 Presented April 17th, 2010, East SYSU ©2009 Soundless. All Rights Reserved. 10F, 705 Guangzhou South Road Guangzhou 510290 China 1
  • 2. Structure Industry Overview 4 Company Competitive Advantage 10 Finance Highlight 15 Ratings 19 2
  • 3. Structure Industry Overview 4 Company Competitive Advantage 10 Finance Highlight 15 Ratings 19 Core Question 1 : Does the industry still have the potential to grow after a surge of 5 years? 3
  • 4. Past: fast-growing market e.g. Jin Jiang Inn 3 listed company in America Period 1: Industry grow slowly Period 3: Industry surged 1996 2002 2006 2009 Period 2: Industry expanded rapidly e.g. Home Inn, S Inn Source: Guosen Securities, www.hotelcn.com 4
  • 5. Present: a more crowded market with low industry entrance barrier High Market Concentration Low industry barrier 2-tier cities competition -Strong brands, e.g. Home -Investment: 4-5 thousand -First-tier cities competition Inns, Jin Jiang Hotel, S Inn RMB per room and private becomes fierce -Abundant financial hotels have the potential to -Home inns dominate the recourses expand. Beijing market while Jin -Outstanding superiority -100 economic hotel brands Jiang Hotel & Han Ting over the ones with smaller in Shanghai Inn, Shanghai market; S scale -On a national scale, 32 Inn, -Competing for market brands with more than 10 South China. leader. hotels and over 1000 rooms. -Second-tier cities become the target market. 5
  • 6. Future: learn from the experience in America Economic Hotel/1-3 Starred Hotel The development of Economic Hotel in America Growth Stage: 0~50% Increase in Economic Hotels doesn’t cause the decrease in 1-3 200% starred hotels. Competition Stage: 50%~100% 100% The hotels compete fiercely. 50% Maturity Stage: 100%~200% Growth Competition Maturity Stage Stage Stage Growth in the industry is limited. 6
  • 7. Future: still much potential for market growth 16% is still at a low level and show much potential for growth. 77% Average 16% 31% 28% 21% 20% 19% 17% 17% 14% 14% 16% 9% Shang Jiang Su Bei Jing Hu Bei He Nan Guang Shan Zhe Jiang Liao Ning Si Chuan Others Hai Dong Dong Rooms in Economic Hotels/Rooms in Starred Hotels 7
  • 8. Future: the economic growth of China support the development of the economic hotels Urbanization Active commercial affairs Government infrastructure -China’s Domestic Need -conferences and exhibition -7 hundred billion allocated will rise at 8.3% from 2007 -SMEs survive after the by government for 111 to 2020 projects financial crisis the SMEs can -Urban residents’ tour rate recover from the strike -As to railway construction, 6 hundred is 166% and the average -The financial crisis also billion was allocated -The cost is 907 RMB while the help the economic hotels passenger carrying rural resident’ tour rate is obtain more market share transportation is 2500 km 105% and the average cost -Long-term contracts from -The total operating is 223 RMB the world top 500 kilometer will be 1.1 corporations hundred thousand km The answer to the core question 1: There is still much potential to grow in economic hotel industry according to the experience of America and the confidence of the economic development in China. 8
  • 9. Structure Industry Overview 4 Company Competitive Advantage 10 Finance Highlight 15 Ratings 19 Core Question 2 : How can S Inn outperform the others? 9
  • 10. Where is S Inn: The Second Largest, but not the scale leader Hotels Rooms in Hotels Home Inn 467 54950 S Inn 7 Days 337 32836 Jin Jiang 238 33554 Han Ting 182 22244 Motel 162 31390 Green Tree Inn 123 14015 Source: Innite Consultant, www.inn.net.cn 10
  • 11. …or the profitability leader…where does S Inn want to go? Leader! Competitors Index Item Number Rate Han Ting Home Inn Scale Index total number of rooms 32,836 4 54950 (1) 22244 (5) Profitability Index occupancy rate 90% 3 92% (2) 95% (1) average price ¥187 --- ¥197 ¥228 Revenue (RMB mm) Hotels 1141.3 S Inn’s scale is still far behind the leader Home 721.4 Inn, while Han Ting leads the profitability. The developing speed of S Inn is the fastest in the 337 whole industry. 252.8 223 106 54.924 S Inn’s goal is to be the leader. 2006 2007 2008 2009 11
  • 12. Strategic resources in growth stage: Locations & Membership Base Market leader in major cities in largest and solidest loyal southern, central and southwest China customer group and revenue resource. As of Dec 2009, its number of hotels stands 1st 98% of room nights sold to in 10 cities and 2nd in 8 cities. members in 2009 9752 Concentrate a superior force to destroy the enemy forces one by one. 6196 City Hotels Rate City Hotels Rate Beijing 39 2 Shanghai 26 6 Guangzhou 37 1 Shenzhen 29 1 1608 Chongqing 14 1 Chengdu 12 1 38 232 Wuhan 24 1 Changsha 17 1 2005 2006 2007 2008 2009 Source: Guosen Securities 12
  • 13. Strategic resources for future maturity stage: Cost controlling system & Management Group Cost controlling Management group Scale effects. Standardization came thoroughly and scale The manager group of S Inn is expanded. Bargain power excellent, especially for their increases. marketing talent and executive capability. The best example for Innovation & Operating their talent is the largest System. S Inn’s IT management membership base. system and E-commerce system is the top one in the circle. The answer to the core question 2: S Inn is not the leader in the industry, but it owns strategic resources (e.g. location, membership base, cost controlling system & management group) to compete in the future. 13
  • 14. Structure Industry Overview 4 Company Competitive Advantage 10 Finance Highlight 15 Ratings 19 Core Question 3 : What is behind the fast-growing revenue? 14
  • 15. Rapid Growth in Revenue & Increase in Profitability Rapid Growth in Revenue Gross Revenue Net Revenue 06~09 Revenue CAGR of 113.53% 1210.1 1141.3 765 721.4 267.8 252.8 58.4 54.9 2006 2007 2008 2009 Increase in Profitability New hotels to contribute to Revenue and Profit Gross Margin (%) Operating Margin (%) Net Profit Margin (%) 14.87% Return on Assets % Earning Per Share 6.47% -1.22% -1.93 -8.07% -9.11% -3.51 -19.31% -5.67 -29.18% -35.72% -48.54% -14.27 15
  • 16. Effective Cost Controls 2008 2009 2008* 2009* Hotel operating costs 730,204 971,550 101.2% 85.1% Sales and marketing expenses 36,897 30,824 5.1% 2.7% General and administrative 93,631 65,074 13.0% 5.7% expenses Total Operating Costs & Expenses 860732 1067448 119.3% 93.5% *Note: ** cost/ Total Net Revenue Effective Cost Controls The ability of cost control is enhancing, as Costs & Expenses of Total Net Revenue decreases. 16
  • 17. Strong Operational Capability, Excellent Debt Paying Ability … 12 Mo 12 Mo 12 Mo Growth 3 Year Dec 07 Dec 08 Dec 09 Rate Average Quick Ratio 0.63 0.72 1.96 172.22% 1.10 Current Ratio 1.50 1.14 2.34 105.26% 1.66 LT Debt/Equity 4.36 1.28 0.09 -92.97% 1.91 Total Debt/Equity 4.61 1.28 0.09 -92.97% 1.99 Strong Operational capability Quick ratio increased by 172.22% year over year and became larger than 1 and Current ratio became larger than 2 for the fiscal year 2009. Excellent Debt Paying Ability Debt/Equity decreased fast over past three years, especially declined by 92.97% for the fiscal year 2009 for its IPO in NSC. The answer to the core question 3: Behind the fast-growing revenue is its disadvantage of profitability. Despite of this, S Inn Holding’s profitability has been increasing significantly. We also find its Effective Cost Controls, Strong Operational capability & Excellent Debt Paying Ability in the key statistics. 17
  • 18. Structure Industry Overview 4 Company Competitive Advantage 10 Finance Highlight 15 Ratings 19 18
  • 19. Valuation Analysis: Core Hypothesis & DCF Valuation Core Hypothesis & Logic We hold the opinion it will have a fast growth in the recent five years and then forecast a long term stable growth of 5% in the future. Measurement: DCF Valuation(FCFE) 1 Discounted FCF To Equity 4 FCF To Equity Estimated in the future 2 Revenues Estimated 5 Discounted Cash Flow Valuation 3 Net Income Estimated 6 Sensitivity Analysis 19
  • 20. Revenues Estimated History Forecast 2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Revenue 54,900,000.0252,800,000. 721,400,000.0 1,141,300,00 1,875,964, 2,686,478, 3,494,434,1 4,245,843,0 4,904,601,7 (RMB) 0 00 0 0.00 436.83 945.46 27.15 96.23 04.13 Growth Rate 360.47% 185.36% 58.21% 64.4% 43.2% 30.1% 21.5% 15.5% Revenue/Reve 145.4722647181.0457809 260.0181546 326.3467288 367.97 389.09 398.02 401.22 402.19 nue Calculated Growth Rate 24.45% 43.62% 25.51% 12.75% 5.74% 2.30% 0.80% 0.24% Revenue 5098131.7 6904501.78779460.61 12194760.5 377391.52621396331.904 2774421.66 3497200.674 10582277.2 Calculated 13 41 6 8 RevPAR(RMB) 151.53 139.20 140.89 139.96 138.56 137.17 135.80 134.45 133.10 No. Of Rooms 85297.2906 109317.007 133943.943 2678 11399 22352 28266 438123 63089.712 In Operation 2 7 2 Occupancy 93.00% 88.00% 88.10% 88.40% 83.98% 79.78% 75.79% 72.00% 68.40% Rate(%) 20
  • 21. Net Income Estimated Operating Income = Revenues - Hotel operating costs – Selling, General & Admin Expenses, Total 2010E 2011E 2012E 2013E 2014E Operating 350,689,306 800,321,344 1,191,676,560 1,472,763,696 1,611,319,168 Income Net Income= Operating Income + Net interest expense – Income Tax Expense 2010E 2011E 2012E 2013E 2014E NET INCOME 306,554,840 731,805,277 1,098,842,732 1,361,125,511 1,488,003,210 21
  • 22. FCF To Equity Estimated History Forecast 2007 2008 2009 2010E 2011E 2012E 2013E 2014E Net Income -122700000-210500000-104000000 306,554,840 731,805,277 1,098,842,732 1,361,125,511 1,488,003,210 Depreciati 130,017,996 on 33800000 123500000 .16 1,341,933,962 1,412,356,774 1,486,475,277 1,564,483,414 1,646,585,310 1.30018E+1 FCInv 3.38E+13 1.235E+14 4 561,964,616 661,803,011 779,378,652 917,842,732 1,080,906,281 WCInv 553,019,197 785,254,601 1,037,737,186 1,263,386,694 1,417,701,511 FCFE 533,504,988.62 697,104,439.4 768,202,170.53 744,379,500.11635,980,727.81 Free Cash Flow To Equity = Net Income + Depreciation – Fixed Capital Investment— Working Capital Investment 22
  • 23. Discounted Cash Flow Valuation Assumption Data Long-Term Growth Rate 5.00% Risk Free Rate 4.00% β(βlevered) 2.10 Rm 9.00% Ke 14.50% Stage 1 2010E 2011E 2012E 2013E 2014E FCFE 495,362,388.62 670,404,619.40 749,512,296.53 731,296,588.31 626,822,689.55 FCFE Valuation PV of Cash Flow(RMB) First Stage 1,371,043,103.45 Second Stage (FV) 4,255,264,606.63 Value of Equity 5,626,307,710.08 Shares 50,280,000.00 Fair Value(RMB) 111.90 6.83 Fair Value(USD) 16.39 23
  • 24. Sensitivity Analysis Results of Sensitivity Long-term Growth Rate(g) Analysis (USD) Ke 4.00% 4.50% 5.00% 5.50% 6.00% 6.50% 7.00% 7.50% 8.00% 9.50% 21.11 21.99 22.98 24.12 25.44 26.98 28.79 30.97 33.63 10.00% 20.07 20.84 21.71 22.69 23.81 25.11 26.62 28.40 30.54 10.50% 19.15 19.83 20.58 21.44 22.40 23.51 24.78 26.26 28.02 11.00% 18.32 18.92 19.59 20.33 21.17 22.12 23.20 24.46 25.92 11.50% 17.57 18.10 18.69 19.35 20.08 20.91 21.84 22.91 24.14 12.00% 16.89 17.36 17.89 18.47 19.12 19.84 20.65 21.57 22.62 12.50% 16.27 16.69 17.16 17.68 18.25 18.89 19.60 20.40 21.30 13.00% 15.70 16.08 16.51 16.97 17.48 18.04 18.67 19.36 20.15 13.50% 15.17 15.52 15.90 16.32 16.78 17.28 17.83 18.45 19.13 14.00% 14.69 15.01 15.35 15.73 16.14 16.59 17.08 17.63 18.23 14.50% 14.24 14.54 14.85 15.19 15.56 15.96 16.40 16.89 17.42 24
  • 25. Ratings: BUY >15% upside Fair Value (RMB) 111.9 Fair Value (USD) 16.39 BUY Closing Price (USD) 11.220 Exchange Rate: 6.8261 (PBOC), 14th/Apr/2010 Rating system BUY >15% upside from the current price HOLD Trade within +15% from the current price SELL >15% downside from the current price 25
  • 26. Summary Industry Overview Core Question 1: Does the industry still have the potential to grow after a 1 surge of 5 years? -Past: Fast-growing market -Present: A more crowded market with low industry threshold -Future: Still much potential for market growth Company Competitive Advantage Core Question 2: How can S Inn outperform the others? 2 -The Second Largest, but not the scale leader or the profitability leader -Strategic resources in growth stage: Locations & Membership Base -Strategic resources for maturity stage: Cost controlling system& Management Group Compete in the Future Financial Highlight 3 Core Question 3: What is behind the fast-growing revenue? -Rapid Growth in Revenue & Increase in Profitability -Strong Operational capability, Excellent Debt Paying Ability & Effective Cost Controls 4 Ratings -Based on our valuation using the DCF Valuation (FCFE), we recommend to BUY. 26
  • 27. Thank You Presented April 17th, 2010, East SYSU ©2009 Soundless. All Rights Reserved. 27