Home Inns (HMIN US):2Q15RevPAR weak;midscale growing;decent upside

Gross revenue missed guidance on weak RevPAR.

    2Q15 gross revenue declined 1.8% YoY to RMB1,411mn, slightly belowmgmt guidance of -1.7% to +0.1% YoY change, due to 1) 5% YoYRevPAR drop to RMB136, and 2) conversion of existing hotels intoHomeInn Plus, impacting the pace of net expansion (+89 hotels QoQ),Due to sticky opex (mainly staff cost for manachised hotels), EBITDAmargin dropped 5ppts YoY to 23%. Under the on-going weak economicenvironment, we see limited sign of RevPAR rebound in the short term.

    Midscale biz still encouraging; continues structural shift.

    Mgmt guided 3Q15E gross revenue to range -1.7% to +0.1% YoY. Whileblended RevPAR is still under pressure, mgmt remains positive onmidscale brands: Yitel’s RevPAR is likely to growth by high-single-digitYoY, while HomeInn Plus is on a good ramp-up track with c.50% ADRpremium to HomeInn. We project HMIN to deliver 3Q15E grossrevenue/EBITDA of RMB1,824mn/464mn, with -3%/-10% YoY.

    Going-private proposal still on the table; undemanding valuation.

    The stock is currently trading at 5.0x FY16E EV/EBITDA. After earningsrevision and roll-over to FY16E, we revise our TP to US$32.50. Tradingat 19% discount to its peer China Lodging while the valuation gap hasbeen narrowing gradually. We believe there is limited downside to theshare price, with decent upside potential from updates aboutprivatization: the US$32.81 proposal is in evaluation stage by specialboard committee. Moreover, we believe potential ease of RevPAR YoYdecline will support the share price rebound. Downside risks include: 1)more-than-expected opex hike, 2) Further steep RevPAR decline.