Soundless, s inn ivestment report 2010

S Inn Investment Report 2010

Presented April 17th, 2010, East SYSU

1

©2009 Soundless. All Rights Reserved.

10F, 705 Guangzhou South Road

Guangzhou

510290

China

Structure

Industry Overview

Company Competitive Advantage

Finance Highlight

Ratings

2

4

10

15

19

Structure

Industry Overview

Company Competitive Advantage

Finance Highlight

Ratings

3

4

10

15

19

Core Question 1 : Does the industry still have the potential to grow after a

surge of 5 years?

Past: fast-growing market

e.g. Home Inn, S Inn

4Source: Guosen Securities, www.hotelcn.com

1996 2002 2006 2009

e.g. Jin Jiang Inn 3 listed company in America

Period 1: Industry grow slowly

Period 2: Industry expanded rapidly

Period 3: Industry surged

Present: a more crowded market with low

industry entrance barrier

-Strong brands, e.g. Home Inns, Jin Jiang Hotel, S Inn

-Abundant financial recourses

-Outstanding superiority over the ones with smaller scale

-Competing for market leader.

5

High Market Concentration Low industry barrier 2-tier cities competition

-Investment: 4-5 thousand RMB per room and private hotels have the potential to expand.

-100 economic hotel brands in Shanghai

-On a national scale, 32 brands with more than 10 hotels and over 1000 rooms.

-First-tier cities competition becomes fierce

-Home inns dominate the Beijing market while Jin Jiang Hotel & Han Ting Inn, Shanghai market; S Inn,

South China.

-Second-tier cities become the target market.

Future: learn from the experience in America

6

The development of Economic

Hotel in America

Growth Stage: 0~50%

Increase in Economic Hotels

doesn’t cause the decrease in 1-3

starred hotels.

Competition Stage: 50%~100%

The hotels compete fiercely.

Maturity Stage: 100%~200%

Growth in the industry is limited.

50%

100%

200%

Growth Stage

Competition Stage

Maturity Stage

Economic Hotel/1-3 Starred Hotel

Future: still much potential for market growth

7

Average 16%

16%

16% is still at a low level and show much potential for growth.

77%

31%28%

21% 20% 19% 17% 17%14% 14%

9%

Shang Hai

Jiang Su Bei Jing Hu Bei He Nan Guang Dong

Shan Dong

Zhe Jiang Liao Ning Si Chuan Others

Rooms in Economic Hotels/Rooms in Starred Hotels

Future: the economic growth of China support

the development of the economic hotels

8

-China’s Domestic Need will rise at 8.3% from 2007 to 2020

-Urban residents’ tour rate is 166% and the average cost is 907 RMB while the rural resident’ tour rate is 105% and the average cost is 223 RMB

Urbanization Active commercial affairs Government infrastructure

-conferences and exhibition

-SMEs survive after the financial crisis the SMEs can recover from the strike

-The financial crisis also help the economic hotels obtain more market share

-Long-term contracts from the world top 500 corporations

-7 hundred billion allocated by government for 111 projects

-As to railway construction, 6 hundred billion was allocated -The passenger carrying transportation is 2500 km

-The total operating kilometer will be 1.1 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.

Structure

Industry Overview

Company Competitive Advantage

Finance Highlight

Ratings

9

4

10

15

19

Core Question 2 : How can S Inn outperform the others?

Where is S Inn:

The Second Largest, but not the scale leader

10

123

162

182

238

337

467

Green Tree Inn

Motel

Han Ting

Jin Jiang

7 Days

Home Inn

Hotels

14015

31390

22244

33554

32836

54950

Rooms in Hotels

Source: Innite Consultant, www.inn.net.cn

S Inn

…or the profitability leader…where does S

Inn want to go? Leader!

11

Index Item Number RateCompetitors

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

54.9

252.8

721.4

1141.3

24106

223

337

2006 2007 2008 2009

Revenue (RMB mm) Hotels

S Inn’s scale is still far behind the leader Home

Inn, while Han Ting leads the profitability.

The developing speed of S Inn is the fastest in the

whole industry.

S Inn’s goal is to be the leader.

Strategic resources in growth stage:

Locations & Membership Base

12

City Hotels Rate City Hotels RateBeijing 39 2 Shanghai 26 6Guangzhou 37 1 Shenzhen 29 1Chongqing 14 1 Chengdu 12 1Wuhan 24 1 Changsha 17 1

Market leader in major cities in

southern, central and southwest China

38 2321608

6196

9752

2005 2006 2007 2008 2009

largest and solidest loyal

customer group and revenue

resource.

98% of room nights sold to

members in 2009

Source: Guosen Securities

As of Dec 2009, its number of hotels stands 1st

in 10 cities and 2nd in 8 cities.

Concentrate a superior force to destroy the

enemy forces one by one.

Strategic resources for future maturity stage:

Cost controlling system & Management Group

13

Cost controlling

Scale effects. Standardization came thoroughly and scale expanded. Bargain power increases.

Innovation & Operating System. S Inn’s IT management system and E-commerce system is the top one in the circle.

Management group

The manager group of S Inn is excellent, especially for their marketing talent and executive capability. The best example for their talent is the largest membership base.

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.

Structure

Industry Overview

Company Competitive Advantage

Finance Highlight

Ratings

14

4

10

15

19

Core Question 3 : What is behind the fast-growing revenue?

Rapid Growth in Revenue & Increase in

Profitability

15

58.4267.8

765

1210.1

54.9252.8

721.4

1141.3

2006 2007 2008 2009

Gross Revenue Net Revenue

-14.27

-5.67

-3.51-1.93

Return on Assets % Earning Per Share

-8.07%-1.22%

14.87%

-35.72%

-19.31%

6.47%

-48.54%

-29.18%

-9.11%

Gross Margin (%) Operating Margin (%)

Net Profit Margin (%)

Rapid Growth in Revenue06~09 Revenue CAGR of 113.53%

Increase in ProfitabilityNew hotels to contribute to Revenue and Profit

Effective Cost Controls

16

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

expenses93,631 65,074 13.0% 5.7%

Total Operating Costs &

Expenses860732 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.

Strong Operational Capability, Excellent Debt

Paying Ability …

17

12 MoDec 07

12 MoDec 08

12 MoDec 09

GrowthRate

3 YearAverage

Quick Ratio 0.63 0.72 1.96 172.22% 1.10Current Ratio 1.50 1.14 2.34 105.26% 1.66LT Debt/Equity 4.36 1.28 0.09 -92.97% 1.91Total 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.

Structure

Industry Overview

Company Competitive Advantage

Finance Highlight

Ratings

18

4

10

15

19

Valuation Analysis: Core Hypothesis &

DCF Valuation

19

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)

Discounted FCF To Equity

in the future

Revenues Estimated

Net Income Estimated

FCF To Equity Estimated1

Sensitivity Analysis

Discounted Cash Flow Valuation2

3

4

5

6

20

Revenues Estimated

History Forecast

2006 2007 2008 2009 2010E 2011E 2012E 2013E 2014E

Revenue

(RMB)54,900,000.0

0

252,800,000.

00

721,400,000.0

0

1,141,300,00

0.00

1,875,964,

436.83

2,686,478,

945.46

3,494,434,1

27.15

4,245,843,0

96.23

4,904,601,7

04.13

Growth Rate 360.47% 185.36% 58.21% 64.4% 43.2% 30.1% 21.5% 15.5%

Revenue/Reve

nue Calculated145.4722647181.0457809 260.0181546 326.3467288 367.97 389.09 398.02 401.22 402.19

Growth Rate 24.45% 43.62% 25.51% 12.75% 5.74% 2.30% 0.80% 0.24%

Revenue

Calculated377391.52621396331.904 2774421.66 3497200.674

5098131.7

13

6904501.7

41

8779460.61

610582277.2

12194760.5

8

RevPAR(RMB) 151.53 139.20 140.89 139.96 138.56 137.17 135.80 134.45 133.10

No. Of Rooms

In Operation2678 11399 22352 28266 438123 63089.712

85297.2906

2

109317.007

7

133943.943

2

Occupancy

Rate(%)93.00% 88.00% 88.10% 88.40% 83.98% 79.78% 75.79% 72.00% 68.40%

Net Income Estimated

Operating Income = Revenues - Hotel operating costs –

Selling, General & Admin Expenses, Total

Net Income= Operating Income + Net interest expense – Income

Tax Expense

21

2010E 2011E 2012E 2013E 2014EOperating Income

350,689,306 800,321,344 1,191,676,560 1,472,763,696 1,611,319,168

2010E 2011E 2012E 2013E 2014ENET INCOME 306,554,840 731,805,277 1,098,842,732 1,361,125,511 1,488,003,210

FCF To Equity Estimated

22

History Forecast

2007 2008 2009 2010E 2011E 2012E 2013E 2014ENet

Income -122700000-210500000-104000000 306,554,840 731,805,277 1,098,842,732 1,361,125,511 1,488,003,210

Depreciati

on 33800000 123500000

130,017,996

.16 1,341,933,962 1,412,356,774 1,486,475,277 1,564,483,414 1,646,585,310

FCInv 3.38E+13 1.235E+14

1.30018E+1

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

Discounted Cash Flow Valuation

23

Assumption Data

Long-Term Growth Rate 5.00%

Risk Free Rate 4.00%

β(βlevered) 2.10

Rm 9.00%

Ke 14.50%

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

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

Sensitivity Analysis

24

Results of

Sensitivity

Analysis

(USD)

Long-term Growth Rate(g)

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

Ratings: BUY

25

Fair Value (RMB) 111.9

BUYFair Value (USD) 16.39

Closing Price (USD) 11.220

BUY >15% upside from the current priceHOLD Trade within +15% from the current priceSELL >15% downside from the current price

Exchange Rate: 6.8261 (PBOC), 14th/Apr/2010

>15% upside

Rating system

Summary

26

Industry OverviewCore Question 1: Does the industry still have the potential to grow after a

surge of 5 years?

-Past: Fast-growing market

-Present: A more crowded market with low industry threshold

-Future: Still much potential for market growth

1

2

Company Competitive AdvantageCore Question 2: How can S Inn outperform the others?

-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

3

Financial HighlightCore 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

4Ratings-Based on our valuation using the DCF Valuation (FCFE), we recommend to BUY.

Thank YouPresented April 17th, 2010, East SYSU

27©2009 Soundless. All Rights Reserved.