How do you define a growth stock? Are you more inclined toward a company that's growing revenue quickly but sacrificing margins, or one that isn't growing its top line much at all but is milking profitability out of its operations?
Home Inns & Hotels (Nasdaq: HMIN ) fits the mold of the former. It was another strong quarter for the Chinese chain of value-priced lodging. Revenue soared 49% to $77.9 million, well ahead of the $71 million that analysts were expecting.
Unfortunately, there is a price to pay for the company's breakneck speed, and you'll find it as you work your way down to the bottom line. Home Inns posted an operating loss for the period, generating an adjusted deficit of $0.03 per fully diluted American depositary share. Wall Street was banking on a small profit.
Home Inns is in hardhat mode. It added 51 net new hotels during this past quarter alone, and its empire now consists of 522 bargain-priced getaways. The speedy construction isn't getting in the way of filling up those rooms, either: An occupancy rate of 82.6% would make most stateside hoteliers envious.
However, as Home Inns expands into smaller markets, it's having to charge less for overnight stays. Add a few promotions to counter the weak economy, and you get a 7% drop in revenue per available room, despite a slight uptick in year-over-year occupancy levels.
Impatient investors aren't going to be happy with the red ink for what has routinely been a profitable company. There are certainly plenty of other profitable ways to play the growth of travel within China.
- Ctrip.com (Nasdaq: CTRP ) runs the leading online travel portal of the same name.
- AirMedia Group (Nasdaq: AMCN ) operates ad networks in all of China's leading airports.
- Expedia (Nasdaq: EXPE ) isn't a pure China play, of course, but the travel portal owns a big piece of smaller Ctrip competitor eLong (Nasdaq: LONG ) .
However, there's still something to be said for Home Inns and its frenetic expansion. It realizes that it will never have a better opportunity to scale than now. Equity markets and most financing outlets have chilled, so potential competitors can't go public to raise the funds necessary to catch up to Home Inns.
The company is correct in treating China like a Monopoly board. The profitability growth will appease investors later. Right now, the chain's guests may be longing for a good night's sleep, but Home Inns itself can't afford to doze off.
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