china economy hotel sector - credit suisse

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S. Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

06 January 2011 Asia Pacific/China Equity Research

Lodging

China Economy Hotel Sector INITIATION

Profiting from the budget end Figure 1: China economy hotel—One of our favourite consumer sub-sectors

Beer

Sanitary(Hengan) Instant Noodle

(Tingyi)

Dairy(Mengniu)Processed meat

(Yurun)Baby diaper

(Hengan)

Shampoo

RTD tea (Tingyi)Wine

Bottled water (Tingyi)

Snack(Want Want)Juice

(Tingyi)0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Concentration

Pen

etra

tio

nF

air

Low High

Und

er

Footwear (Belle)

Economy hotel (7 Days & Han Ting)

Under-penetration & High-concentration

Note: Relative penetration = China penetration /neighbouring economies; Concentration = the

combined market share of top-3 players; Source: Company data, Credit Suisse estimates

■ Strong sector growth CAGR of 26% for 2010-15E. We expect the branded economy hotel sector’s exciting growth in China to be driven by: (1) strong consumption demand (on a robust economy, fast-growing small and medium enterprises (SME), rising incomes, lifestyle changes, convenient infrastructure and government policy support); and (2) industry consolidation on the supply side (with continuous market share gains from medium/low-end hotels).

■ Unique business model to play out the growth. Given their asset-light and franchise strategy, branded economy hotels are able to replicate their business models rapidly across China. Compared with traditional asset-heavy hotels, economy hotels manage to deliver higher EBITDA growth, EBITDA margins and ROE, while trading at lower EV/EBITDA multiples.

■ Initiating coverage. Growth quality is our priority, when we pick stocks from a fast-growing sector. We run a fundamental scorecard to assess the leading players’ growth momentum and growth quality. We expect 7 Days (OUTPERFORM) to outpace its peers in expansion, based on its focused strategy, online booking system and membership scheme. We believe Han Ting (OUTPERFORM) has a stronger capability in translating hotel expansion into earnings growth.

Research Analysts

Kevin Yin 852 2101 7655

[email protected]

06 January 2011

China Economy Hotel Sector 2

Focus charts and table Figure 2: Sector growth of 26% CAGR for 2010-15E Figure 3: A huge addressable market – 97% of total

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

2000 2002 2004 2006 2008 2010 2012 2014

87% CAGR 2000-05

60% CAGR 2005-10E

26% CAGR 2010-15E

(Economy hotel count)

Branded

economy

hotels

1%

4-5 star hotels

2%

1-3 star

hotels

Guest houses

Private

accomodations

Others

Branded economy hotels'

target market - 97%

Source: China Hotel Association, Credit Suisse estimates Source: CEIC, Euromonitor, Inntie

Figure 4: Peer comparison – adjusted EBITDA margin Figure 5: Cost structure (as a % of net revenue, 2009)

46%

36%32% 31% 29% 29%

27% 27% 26%

15%

7%

0%

10%

20%

30%

40%

50%

Kosm

opol

ito

Inte

rCon

tinen

tal

Shan

gri-l

a

Shan

ghai

Jinj

iang

Han

Ting

7 Da

ys

M&C

Hong

kong

&Sh

angh

ai

Whi

tbre

ad

Acco

r

Rez

idor

(%)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Rent

s

Pers

onne

lco

sts D&A

Util

ities

Cons

umab

les

and

F&B

Oth

ers

- 7 Days - Han Ting

(%)

Source: Company data, Credit Suisse estimates Source: Company data

Figure 6: Stock pick summary – positives, negatives, catalysts and valuation Company Rating TP (US$) Upside Valuation Positives Negatives Catalysts

7 Days O 28.8 40% • Trades at 11.7x EV/EBITDA

• Business model easy to replicate

across China

• Vulnerable under an

inflationary environment

• Stronger YoY/QoQ travel

growth data Target EV/room = US$ 17.4K • Target at 16.3x

EV/EBITDA • Strong booking system and

membership to lower SG&A • Execution risk due to fast

expansion • Faster openings than

market expected • Defensive in down-cycle

China Lodging

O 26.9 18% • Trade at 13.1x EV/EBITDA

• Strong in translating expansion into earnings growth

• Narrower city coverage • Ugly YoY travel data

(Han Ting) Target EV/room = US$ 19.8K • Target at 16.5x EV/EBITDA

• Earnings less sensitive to inflation impact

• Post-Expo slowdown • Faster openings than market expected

• Solid management, balance

growth and quality

Note: O = Outperform; N = Neutral; Source: Credit Suisse estimates

06 January 2011


Profiting from the budget end A strong sector CAGR of 26% for 2010-15E We like the branded economy hotel sector in China, mainly due to its exciting growth. The sector has experienced an 87% CAGR in 2000-05; we expect a 60% CAGR in 2005-10E and 26% CAGR in 2010-15E. We believe the sector’s growth is mainly fuelled by: (1) strong consumption demand, driven by a robust macro economy, fast-growing SMEs, rising incomes, lifestyle changes, consumption upgrades, more convenient infrastructure and government policy support; and (2) industry consolidation on the supply side (economy hotels are gaining market share from medium to low-end hotels/guest houses, which have a 96% market share). Assuming China’s total hotel number remains constant in 2015, we estimate that economy hotels would still have only a 5.5% market share (versus the current 0.9%), implying huge industry consolidation potential in the long term.

A unique business model to play out the growth 7 Days and Han Ting (China Lodging) are the third- and fifth-largest branded economy hotel operators in China. They lease and convert properties into hotels, and also leverage on their franchise strategy to collect royalty fees for sharing brands and systems. Based on this flexible asset-light strategy and standardised business model, they are able to replicate hotels rapidly across the country, and hence, capitalise on China’s long-term domestic consumption boom. Compared with traditional asset-heavy star hotels, the branded economy hotels deliver higher EBITDA growth, EBITDA margin and ROE.

Growth quality remains key Growth quality is our priority, when we pick stocks from a fast-growing sector. We ran a fundamental scorecard to assess the market leaders. 7 Days stands out in the new hotel expansion pace, given its focus and simple strategy, strong online booking system and club membership scheme. It has a lower breakeven occupancy level, leaving it more defensive in an economic down-cycle. Han Ting outperforms in terms of core EBITDA growth, EBITDA margin and ROE. Its stronger financials are proof of its strong capability in translating hotel expansion into real earnings growth. Han Ting is less vulnerable in an inflationary environment, given its superior profitability.

Valuation, recommendation, catalysts and risks We use DCF as our primary valuation methodology, as we believe DCF is able to better capture a company’s medium to long-term growth. We use EV/EBITDA multiple as the secondary methodology, as we believe it is a better model to value a hotel company’s real and normalised earnings capability and quality.

We rate 7 Days an OUTPERFORM, with a target price of US$28.8 (40% potential upside and 16.3x 2011E EV/EBITDA). Possible stronger-than-expected expansion growth is the major catalyst for 7 Days. We like Han Ting (OUTPERFORM; target price of US$26.9 implying 18% potential upside and 16.5x 2011E EV/EBITDA) on its stronger capability to translate hotel expansion into earnings growth. The expected QoQ travel data is likely to create price volatility, and we believe this represents a great buying opportunity.

Investment risks include high inflation, execution risks, an outbreak of epidemics and natural disasters, operating leverage and economy volatility.

Exciting growth: strong consumption demand + industry consolidation on supply side

Asset-light + franchise strategy = higher EBITDA growth, margin and ROE

We ran a fundamental score card to assess the growth momentum and growth quality of stocks

Valuation based on DCF and EV/EBITDA

Conclusion: Buy 7 Days and Han Ting

06 January 2011


Sector valuation comparison Figure 7: Target price derivation and comparison summary Trading Trading EV/core Core Core

Company Ticker Market Trading Target Potential Rat. EV/EBITDA EBITDA EV/room EBITDA EBITDA

cap price price upside 10E 11E 12E 10E 11E 12E 11E 2009-12E 2010-15E

(US$ mn) (US$) (US$) (%) (x) (x) (x) (x) (x) (x) US$’000 CAGR (%) CAGR (%)

7 Days SVN US 1,023 20.58 28.8 40 OP 16.5 11.7 8.4 14.2 10.2 7.6 12.0 45.1 29.2

China Lodging HTHT US 1,344 22.81 26.9 18 OP 17.9 13.1 8.5 14.1 10.7 7.5 15.5 56.9 31.9

Note: EBITDA = GAPP EBITDA – SBC expense – non-recurring items, Core EBITDA = EBITDA – pre-opening expense

Source: Company data, Credit Suisse estimates; As of 5 January, 2011

Figure 8: Sector valuation comparison BBG Share Mkt P/E (x) EV/EBITDA (x) P/BV (x) ROE (%) 3-yr 11

Company code price cap 10E 11E 12E 10E 11E 12E 10E 11E 12E 10E 11E 12E CAGR * PEG

(l.c.) (US$ mn) (%) (%) (x) (%) (x)

China budget hotel

7 Days SVN US 20.58 1,023 43.2 29.6 20.4 16.5 11.7 8.4 4.9 4.2 3.5 11.9 15.2 18.6 45.6 0.3

China Lodging HTHT US 22.81 1,344 44.2 38.2 23.4 17.9 13.1 8.5 5.0 4.4 3.7 22.3 12.7 17.8 37.4 0.4

Average – budget hotel 43.8 34.5 22.1 17.3 12.5 8.5 5.0 4.3 3.6 17.8 13.8 18.1 40.9 0.3

Global lodging peers

Shangri-La Asia 0069.HK 22.25 8,270 33.3 26.6 23.3 20.3 16.1 14.1 1.9 1.7 1.6 6.0 7.0 7.0 15.5 1.7

HK & Shanghai Hotels* 45 HK 13.70 2,568 42.2 31.0 29.0 21.4 17.7 17.0 0.9 0.9 0.8 2.0 2.7 2.9 20.6 1.5

Shanghai Jinjiang* 600754 CH 23.50 2,243 35.9 36.4 30.0 20.6 17.6 15.0 3.5 3.3 3.2 9.3 9.4 10.5 35.7 1.0

Kosmopolito Hotels 2266.HK 1.76 453 61.2 28.6 14.0 34.6 20.0 12.1 23.0 1.3 1.2 32.0 8.0 9.0 100.0 0.3

Accor ACCP.PA 33.45 10,165 26.4 25.5 22.5 9.8 8.2 7.1 1.7 1.7 1.6 4.0 7.0 7.0 7.8 3.3

InterContinental Hotels IHG.L 1,303 5,703 21.1 18.3 16.2 12.2 10.6 9.2 16.7 10.8 7.7 87.0 58.0 47.0 14.5 1.3

Whitbread WTB.L 1,832 5,028 18.9 15.9 13.9 11.6 10.0 8.9 2.9 2.6 2.3 14.0 16.0 17.0 17.7 0.9

Millennium & Copthorne MLC.L 587.00 2,856 21.7 16.5 14.6 11.0 8.9 7.7 1.0 1.0 0.9 5.0 6.0 6.0 22.5 0.7

Rezidor Hotel REZT.ST 39.90 917 107.2 33.1 19.1 18.0 10.4 7.4 4.0 3.6 3.1 1.0 6.0 0.0 134.5 0.2

Average – Global lodging 29.7 24.0 20.7 14.7 11.9 10.4 4.5 3.2 2.6 18.7 15.6 14.0 19.5 1.8

Source: Bloomberg*, Company data, Credit Suisse estimates; As of January 5, 2011

Figure 9: Stock pick summary—trading versus target valuation comparison Trading multiples

Trading Trading EV/EBITDA Trading EV/core EBITDA EV/room

price 10E 11E 12E 10E 11E 12E 11E

US$ (x) (x) (x) (x) (x) (x) US$ '000

7 Days 20.58 16.5 11.7 8.4 14.2 10.2 7.6 12.0

China Lodging 22.81 17.9 13.1 8.5 14.1 10.7 7.5 15.5

Target price implied multiples

Target Implied EV/EBITDA Implied EV/core EBITDA EV/room

price 10E 11E 12E 10E 11E 12E 11E

US$ (x) (x) (x) (x) (x) (x) US$ '000

7 Days 28.8 22.9 16.3 12.0 20.5 14.8 11.0 17.4

China Lodging 26.9 21.5 16.5 10.9 17.9 13.6 9.5 19.8

Source: Company data, Credit Suisse estimates；As of 5 January 2011

06 January 2011


Table of contents Focus charts and table 2 Profiting from the budget end 3

Strong sector growth CAGR of 26% for 2010-15E 3 A unique business model to play out the growth 3 Growth quality remains key 3 Valuation, recommendation, catalysts and risks 3

Sector valuation comparison 4 Strong sector growth CAGR of 26% in 2010-15E 6

Comparison with traditional hotels 6 Two major sector growth drivers 7

1) Demand: strong demand from both business and leisure travels 7 2) Supply: huge industry consolidation potential 9

Who runs faster? 10 Rapid expansion at the expense of occupancy? 12

A unique business model to play out the growth 14 Leased-and-operated or franchised-and-managed 14 Brand focus or diversification 15 Geographical expansion and city tiering 16 Segmentation, location, pricing and discounting policy 16 Inflation: inevitably hurts margins 18 Investment cycle and breakeven period 19 Management profile 20 Sensitivity analysis 20

Growth quality remains key 22 A fundamental scorecard to measure growth quality 22

Key performance indicator comparison 24 Valuation, stock picks and risks 29

Valuation methodology 29 Stock picks 30 Sector investment risks 32

China Lodging Group (HTHT.OQ / HTHT US) 34 Translating expansion into earnings growth 34 Investment risks 38

7 Days Group Holdings Ltd. (SVN.N / SVN US) 40 Simple, easy and fast 40 Investment risks 44

Appendix 1: Overview of China lodging industry 46 Appendix 2: Overview of China branded economy hotel sector 47 Appendix 3: Snapshot of Top-ten 50 Appendix 4: Overview of US lodging industry 52 Appendix 5: What customers care about? 53 Appendix 6: Customer perceptions? 55

06 January 2011


A strong sector CAGR of 26% for 2010-15E China’s branded economy hotel sector’s attractiveness lies in its strong growth, in our view. In terms of hotel numbers, the sector experienced a 87% CAGR over 2000-05; we expect a 60% CAGR in 2005-10 and 26% in 2010-15E. We believe this exciting sector growth is mainly driven by fast-growing consumption needs (demand side) and industry consolidation (supply side).

7 Days is the third-largest operator, with a market share of 9.3%; Han Ting is the fifth-largest with a market share of 7.8%. We expect them to continue riding on the robust economic development and further consolidate the sector.

Figure 10: China branded economy hotel sector – marked by strong growth

23 36 50 87 166 522 9061,698

2,8053,757

5,448

7,627

9,915

12,294

14,753

17,409

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

87% CAGR 2000-05

60% CAGR 2005-10E

26% CAGR 2010-15E

(Economy hotel count)

Source: China Hotel Association, Credit Suisse estimates

Comparison with traditional hotels Branded economy hotels refer to medium- to small-scale hotels that provide quality room facilities (such as cosy beds, clean en suite bathrooms and free broadband service) to satisfy customers’ basic accommodation needs.

■ A typical branded economy hotel has 120 rooms, compared with 350-380 rooms for a 5-star hotel, 200-230 rooms for a 4-star hotel, and 115-130 rooms for a 3-star hotel.

■ The leading economy hotels in China are branded chain hotels. They do not participate in the Chinese government’s hotel star rating system. However, their facility quality is equivalent to that of a three-star hotel.

■ The branded economy hotel targets budget-minding travellers, with a competitive hotel room rate below Rmb250 or US$38.

■ Branded economy hotels do not own the property. They either lease the property or adopt a franchise business model (providing guidance, sharing brand name, monitoring with operation standards, collecting franchise fees without bearing operation costs and risks). Most traditional hotels own the properties.

■ Given the asset-light strategy and standardised business model, China’s branded economy hotel operators are able to replicate new hotels very rapidly in China. In general, the leading players plan to open 200-250 new hotels per annum.

We see strong growth as the major attraction of the sector

Size

Star rating

Room rate

Asset light strategy + franchise

Fast expansion

06 January 2011


■ As rentals account for nearly 30% of hotel room revenues, this requires economy hotels to achieve more than a 60% occupancy rate to break even on an EBITDA basis. This compares with asset-heavy 3-star hotel’s nearly 30-40%.

■ China’s branded economy hotels are generally able to deliver 13-15% ROE, while most asset-heavy star hotel’s ROE is below 10%.

Figure 11: A quick look at an economy hotel room Figure 12: A quick look at an economy hotel bathroom

Source: 7 Days Source: Han Ting Express

Figure 13: Peer comparison – 2011 adjusted EBITDA margin

46.0%

36.0%32.0% 30.5% 29.4% 29.3%

27.0% 26.8% 26.0%

15.0%

7.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

Kosm

opol

ito

Inte

rCon

tinen

tal

Sha

ngri-

la

Shan

ghai

Jinj

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Han

Ting

7 D

ays

M&C

Hon

gkon

g &

Shan

ghai

Hot

els

Whi

tbre

ad

Acco

r

Rezid

or

(%)

Source: Credit Suisse estimates; Bloomberg

Two major sector growth drivers We believe the branded economy hotel sector’s strong growth is mainly driven by: 1) the fast-growing consumption demand and 2) the dynamic change in hotel supply.

1) Demand: strong demand from both business and leisure travels

According to the China Hotel Association, nearly 60-70% of economy hotel stays are for business travel and 30-40% for personal leisure travel. Han Ting’s clientele are in line with the sector average, while 7 Days has more exposure to personal leisure travel.

Higher breakeven occupancy

Better RoE

06 January 2011


We believe the strong demand for economy hotels is fuelled by: 1) robust underlying macro economy development; 2) emerging and developing small and medium enterprises (SME); 3) consumption upgrades and lifestyle changes underpinned by rising discretionary income; 4) convenient transportation as a result of government’s infrastructure investment; and 5) China’s long holidays, such as golden week for Chinese new year, labour day and the national day scheme.

In the newly announced 12th Five-Year Plan, the Chinese government reiterated its commitment to encourage domestic consumption and further develop consumer service industry. This bodes well for the long-term outlook of the branded economy sector, which creates job opportunities and additional spending on food and beverage, catering, tourism and discretionary items.

Figure 14: Peer comparison – hotel customer clientele Figure 15: SME growth in China

70%

45%

30%

55%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Han Ting 7 Days

For business travel For leisure travel

2426

28

32

3537

40

4447

50

20

30

40

50

60

2003 2004 2005 2006 2007 2008 2009 2010E2011E2012E

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%(mn) 2003-2012E CAGR: 8 .7% (%)

Source: Company data Source: iResearch

Figure 16: Domestic tourism expenditure growth in China Figure 17: Disposable income growth – urban household

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

-20%

-10%

0%

10%

20%

30%

40%

Domestic tourism expend itures YoY Growth

(Rmb mn) (%)2000-2009 CAGR: 13.8%

6,000

8,000

10,000

12,000

14,000

16,000

18,000

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

Disposable income per capita : Urban Household YoY Growth

(Rmb) (%)2000-2009 CAGR: 11.8%

Source: CEIC Source: CEIC

5 growth sources for demand

Beneficiary of China’s 12th Five-Year Plan

06 January 2011


2) Supply: huge industry consolidation potential

China’s lodging industry is dominated by middle/low-end accommodation, including standalone, non-rated, non-chain hotels and guest houses, which have a combined market share of nearly 95% (in terms of hotel numbers). Star hotels account for 4.5% of total market supply. Of which, 0.7% are the upscale luxury hotels (such as 4 and 5-star hotels), and 3.8% are 1- to 3-star hotels.

Branded economy hotels that focus on cleanliness, safety, convenience and value-for-money have attracted consumers rapidly, after being introduced in China in the late 1990s. During 2000-08, the number of branded economy hotels saw a significant 82% CAGR, compared with the overall industry’s 4% CAGR. However, even at end-2008, the branded economy hotel segment accounted for only 0.9% of China’s total hotel counts or 1.1% of China’s total hotel numbers.

Figure 18: China lodging industry breakdown by hotel counts 2000 2008 CAGR 2000-08 (%)

Hotel count (units) 237,800 315,893 4

(A) Star hotels 6,029 14,099 11

- 1- to 3-star hotels 5,560 11,846 10

- 4- and 5-star hotels 469 2,253 22

(B) Non-star hotels 231,771 301,794 3

- Branded economy hotels 23 2,805 82

- Non-chain, guest houses 231,748 298,989 3

2000 2008 Mix change

Hotel count mix (%) 100.0 100.0 0.0

(A) Star hotels 2.5 4.5 1.9

- 1- to 3-star hotels 2.3 3.8 1.4

- 4- and 5-star hotels 0.2 0.7 0.5

(B) Non-star hotels 97.5 95.5 -1.9

- Branded economy hotels 0.0 0.9 0.9

- Non-chain, guest houses 97.5 94.6 -2.8

Source: National Tourism Administration of China, Euromonitor, Inntie

Figure 19: Our favourable cluster = under-penetration + high concentration

Beer

Sanitary(Hengan) Instant Noodle

(Tingyi)

Dairy(Mengniu)Processed meat

(Yurun)Baby diaper

(Hengan)

Shampoo

RTD tea (Tingyi)W ine

Bottled water (Tingyi)

Snack(Want Want)Juice

(Tingyi)0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Concentration

Pen

etra

tio

nF

air

Low High

Und

er

Footwear (Belle)

Economy hotel (7 Days & Han Ting)

Under-penetration & High-concentration

Note: Relative penetration level = China penetration / neighbouring economies; Concentration level =

the combined market share of top-3 players;

Source: Company data, Credit Suisse estimates

95% of the market is dominated by non-chain non-rated medium/low-ended hotels and guest houses

However, branded economy hotel has less than 1% market share

06 January 2011


Compared with developed markets, China’s economy hotel sector is very fragmented and underpenetrated. This implies enormous growth potential for the key market leaders to further gain market share from other segments (non-rated and non-chain hotels, guest houses and 1- to 3-star hotels), in the medium to long term.

■ The economy hotel chain category accounts for 15% of China’s overall economy hotel sector, compared with 70% for the US.

■ Branded economy hotel rooms per 1,000 urban residents amounted to 0.52 in China, compared with 8.19 in the US.

■ The five-largest branded economy hotels have a combined share of 0.6% in China’s overall lodging industry, compared with 9% in the US.

Thus, we believe there’s huge industry consolidation potential for the market leaders. We expect the branded economy hotels’ market share to rise from 0.9% in 2008 to 5.5% in 2015, assuming that: (1) China’s hotel count in 2015 would remain at 2008’s level (315,893 units) and 2) the branded economy hotel sector would see a 26% CAGR from 2010-15.

Who runs faster? We outline China’s branded economy hotel sector model and present a snapshot of the top-ten players in China.

■ In terms of hotel rooms, 7 Days is the third largest with a market share of 7.8% and Han Ting the fifth largest with a market share of 6.7%.

■ In terms of hotel rooms, the top-three players have a combined market share of 33%; the top-ten have a combined market share of 57%; and 7 Days and Han Ting have a combined market share of 15%.

■ For 2010-15, we forecast 7 Days to have a 31% CAGR and Han Ting to have a 29% CAGR. This compares with our sector growth projection of a 26% CAGR. We expect the three major players to retain their leading positions in 2015 and their combined hotel numbers to account for 32% in 2015.

Figure 20: China branded economy hotel sector model (in terms of hotel counts, 2005-15E) CAGR (%)

2005 2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2005-10 2010-12E 2010-15E

Total hotel count (units) 522 1,698 2,805 3,757 5,448 7,627 9,915 12,294 14,753 17,409 60 35 26

Tot. hotel count YoY (%) 214 87 65 34 45 40 30 24 20 18

Hotel count (units) 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015

- 7 Days (SVN) 5 106 223 337 507 757 1,017 1,317 1,627 1,957 152 42 31

- Han Ting (HTHT) 67 167 236 426 636 856 1,076 1,296 1,516 101 42 29

- Others 449 1,259 1,944 2,568 3,699 5,168 6,726 8,335 10,014 11,870 52 35 26

Hotel count YoY (%) 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015

- 7 Days (SVN) 342 110 51.1 50.4 49.3 34.3 29.5 23.5 20.3

- Han Ting (HTHT) 158 149 41.3 80.5 49.3 34.6 25.7 20.4 17.0

- Others 171 74 54 32.1 44.0 39.7 30.1 23.9 20.1 18.5

Hotel count share (%) 2005 2007 2008 2009 2010 2011 2012 2013 2014 2015

- 7 Days (SVN) 1.0 6.2 8.0 9.0 9.3 9.9 10.3 10.7 11.0 11.2

- Han Ting (HTHT) 0.0 3.9 6.0 6.3 7.8 8.3 8.6 8.8 8.8 8.7

- Others 86.0 74.1 69.3 68.4 67.9 67.8 67.7 67.8 67.9 68.2

Source: China Hotel Association, Company data, Credit Suisse estimates

Highly underdeveloped compared with the US market

Significant potential for industry consolidation

Expecting 7 Days’ hotel count to grow faster in 2010-15, followed by Han Ting

06 Jan

uary 2011

Ch

ina E

con

om

y Ho

tel Secto

r 11

Figure 21: A snapshot of the top-ten banded economy hotels in China Hotel Hotel

Ranking Brand counts room counts Room

1H10 (Mkt shr) (Mkt shr) per Rate

(2009) (units) (%) (units) (%) hotel (Rmb) Set up Listing Web Note

1 (1) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2 (2) 锦江之星 (Jinjiang Inn)

358 7.8 48,035 9.5 134 181 1996.5 2006.12 (China) www.jinjianginns.com Jinjiang Inn (600754.CH) is the budget hotel brand under Jinjiang International Group (2006.HK)

3 (4) 7天 (7 Days Inn)

399 8.7 39,561 7.8 99 165 2005.3 2009.11 (US) www.7daysinn.cn Owns the largest registered membership (14 mn as of 3Q10) and has a superior IT platform.

4 (3) 莫泰 168 (Motel 168)

220 4.8 37,004 7.3 168 190 2002 Private www.motel168.com Two sub-brands: Motel 168 (main brand) and Motel 268 (premium brand). MS Private Equity owns part of Motel 168's

5 (5) 汉庭 (Han Ting)

294 6.4 33,718 6.7 115 200 2005.4 2010.3 (US) www.htinns.com Owns three sub-brands: HanTing Seasons (premium brand), Express (main brand) and Hi-inn (low-end). Founded by Ji Qi (Co-founder/former CEO of Ctrip).

6 (6) 格林豪泰 (Green Tree Inn)

232 5.0 23,623 4.7 102 200 2004.11 Private www.998.com Under GreenTree Inns Hotel Management Group, which was founded by several American investment enterprises and is the only wholly owned foreign hotel enterprise in China.

7 (7) 速 8 (Super 8)

167 3.6 15,595 3.1 93 207 1974 (US); 2004.4 (China)

2006.7 (US) www.super8.com.cn Under Wyndham Worldwide which is one of the world's largest hospitality companies across six continents. Entered China in 2004.

8 (8) 宜必思 (ibis Hotel)

42 0.9 7,661 1.5 182 202 2004.4 (China) 2003.6 (France) www.ibis.cn Under Accor, one of the world’s leading hotel managers operating hotels ranging from budget to upscale worldwide. Entered China in 2004.

9 (9) 中州快捷 (Hotel Home)

25 0.5 3,148 0.6 126 143 2002.3 Private www.zzkjinns.com Focused on Henan Province; Under Zhongzhou International Group, the largest hotel group in middle and West China.

10 (12) 城市客栈 (City Inn) 19 0.4 2,695 0.5 142 237 2005 Private www.cityinn.com.cn Focus on Guangdong; Under OCT International (华侨城), a leading professional hotel management company (midscale + budget hotels).

Top-3 31 33 116 174

Top-10 53 57 128 190

7 Days, Han Ting 15 15 107 183

Source: Inntie

06 January 2011


Rapid expansion at the expense of occupancy? Despite rapid expansion, the sector’s occupancy rate stayed at 82-89% over 2005-07, way higher than the 61% for the China lodging industry for the same period. The leading players’ occupancy has been even higher. Han Ting’s occupancy rate amounts to 93.3% and 7 Days’ 87.8% in 2010, by our estimates.

■ Comparing China with the US: The China lodging industry’s average occupancy rate has been similar to the US lodging industry average. Over 2000-09, China’s total hotel number increased at a 4% CAGR, while the China industry average occupancy rate ranged from 55.9-61%. During the same period, the US’s total hotel numbers declined at a 1% CAGR (a 23% YoY dip in 2001), while the US industry average occupancy rate ranged from 54.7-63.7%.

■ Compared with China’s star hotels: During 2000-09, the average occupancy rate for China’s five-, four- and three-star hotels amounted to 62.4%, 63.1% and 60%, respectively, versus the China lodging industry average of 59%, and two-star hotel’s 56% and one-star hotel’s 50.4%.

We attribute the one to two-star hotels’ underperformance to: 1) the emergence and development of branded economy hotels, which have been gaining market share; and 2) the consumption upgrade and rising desire for quality facilities and services.

The occupancy rate dip in 2003 was due to the outbreak of SARS in China.

Figure 22: Occupancy – US, China and China economy

hotels

Figure 23: Occupancy – China star hotels vs average

50.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

90.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

US lodging industry China lodging industry

China economy hotel sector

45.0%

50.0%

55.0%

60.0%

65.0%

70.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

China lodging av e 5-Star 4-Star

3-Star 2-Star 1-Star

Source: China Hotel Association, CEIC Source: China Hotel Association, CEIC

■ Our projection for long-term occupancy rate: It is possible that the sector occupancy rate would fall, following more capacity coming on line. For the next five years, we believe the three market leaders will continue riding on the robust economy growth and their first-mover advantages. We forecast their occupancy rates to remain at around 85% in 2015, compared with 88-93% in 2010.

In 10-20 years’ time, we estimate the economy hotel sector occupancy will decline to 70-75%, while the market leaders will have higher-than-sector-average occupancy.

China and the US have similar levels of industry occupancy

China’s four to five-star hotels outperform the China average

Our forecast: c. 85% in 2015 and 70-75% in 10-20 years’ time

06 January 2011


Figure 24: Occupancy – 7 Days and Han Ting continue to outperform sector average

75.0%

77.0%

79.0%

81.0%

83.0%

85.0%

87.0%

89.0%

91.0%

93.0%

95.0%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

China economy hotel sector Han Ting (HTHT) 7 Days (SVN)

Source: China Hotel Association, Company data, Credit Suisse estimates

■ Breakeven occupancy level comparison: According to our estimates, 7 Days and Han Ting’s leased-and-managed hotels are able to break even on an EBITDA basis in 2011, when the occupancy rate reaches 60% and 63%, respectively.

We attribute the divergence to pricing strategy, cost management and operation efficiency.

The breakeven occupancy rates are 22-25% lower than our occupancy projection of 85% for 2015.

Figure 25: Breakeven occupancy levels (on 2011E

adjusted core EBITDA basis, LO hotels)

Figure 26: Breakeven occupancy levels (on 2011E

adjusted core net profit basis, LO hotels)

60.0%

63.0%

50.0%

55.0%

60.0%

65.0%

7 Days Han Ting

75.0%

81.0%

55.0%

60.0%

65.0%

70.0%

75.0%

80.0%

85.0%

7 Days Han Ting

Note: Adjusted core EBITDA = EBITDA – pre-opening exp – SBC

exp – other non-recurring items;

Source: Credit Suisse estimates

Note: Adjusted core net profits = NP – pre-opening exp – SBC exp

– other non-recurring items;

Source: Credit Suisse estimates

06 January 2011


A unique business model to play out the growth Compared with traditional hotels, China’s branded economy hotel operators employ a different business model. Here, we compare and assess the key players’ business model, execution skills and management quality in detail. We believe that this is the foundation of the companies’ growth momentum and growth quality.

Leased-and-operated or franchised-and-managed Leased-and-operated (LO) hotels are the primary strategy for 7 Days and Han Ting. They lease the property from third parties and then convert them into hotels. In addition, they use a franchised-and-managed (FM) strategy, by collecting royalty fees for sharing the brand name and system.

■ Leased-and-operated hotels generally outperform franchised-and-managed hotels, in terms of room rate and occupancy.

■ Franchised-and-managed hotels require less investment capital. As a result, based on limited financial resources, brand owners have more incentive to open franchised hotels and gain market share rapidly.

■ Based on different accounting treatments, an operator with more franchised-and-managed hotels generally has a higher blended margin.

Figure 27: Leased-and-operated hotel vs franchised-and-managed hotel Who hires Who bears Who and pays Who capex & pre- Centralised call runs hotel owns opening centre and Room Accounting hotel? staff? property? expense? procurement? rate Occupancy treatment Leased-and-operated hotel (LO)

Brand owner Brand owner Landlord Brand owner Owned by brand owned, shared with franchisee

Consolidated

Franchised-and-managed hotel (FM)

Franchisee; hotel manager from franchiser

Franchisee Landlord / franchisee

Franchisee Owned by brand owned, shared with franchisee

Depends on location; in general, LO's room rate is higher than FM

Depends on location; in general, LO's occupancy is higher than FM

FM has higher accounting


Figure 28: Leased hotels as a % of total hotel count

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E

7 Days Han Ting


LO hotels: better operation; FM hotels: better financial incentive

06 January 2011


Figure 29: Peer comparison – franchise scheme Han Ting 7 Days Jinjiang Inn

HTHT US SVN US 600754 SS

Franchise agreement term 8 years 5 years 8 years

Initial franchise fee Rmb3,000 per room Rmb3,000 per room Rmb2,500 per room

Rmb100,000 Rmb200,000 Rmb200,000

Brand royalty fee 3-4% of total hotel revenue 7% of total hotel revenue 4.5% of total hotel revenue; Rmb10 per room/month

Annual management fee 2-3% of total hotel revenue

IT installation & maintenance fee Rmb10,000 for installation; Rmb1,000 per year for maintenance

n.a n.a

Software fee N/A n.a n.a

Pre-opening supporting fee Rmb8,000 per month n.a n.a

Training fee n.a Rmb6,000 n.a

Accounting and call centre cost allocation n.a Rmb6,000 per month n.a

Source: Company data

Brand focus or diversification Figure 30: Peer comparison – hotel brand management 7 Days Han Ting

1) Midscale hotels n.a Han Ting Seasons Hotel

(or 3 and 4-star hotels) 汉庭全季酒店

2) Typical express hotels Han Ting Express

7 Days 汉庭快捷酒店

3) Inn or hostels 7天连锁 Han-Ting Hi-inn

汉庭海友客栈


We prefer the economy hotels that have a focused strategy on brand and format management, as we believe this focused strategy enables the hotel operator to replicate the business model more rapidly. 7 Days is more focused on standard hotel products than its peers.

■ Han Ting has a full product portfolio to cater to different customers in each category. Han Ting’s mid-scale hotel is 130 rooms and capex per hotel is Rmb9.8 mn. This strategy is more flexible in terms of both financial and operational angles, in our view.

■ 7 Days focuses on only one hotel format and brand. With this simple business model, the company is able to rapidly replicate its footprint across the country. We prefer 7 Days’ brand management strategy over Han Ting.

Figure 31: Hotel brand portfolio – Han Ting Brand Han Ting Express Han Ting Seasons Hotel Han-Ting Hi-inn

汉庭快捷酒店汉庭全季酒店汉庭海友客栈

Target customers Junior to middle-level business travellers and value-conscious travellers

Mid-level corporate managers and SME owners

Budget-constrained young travellers, students and new college graduates

Room rate (Rmb) 150-300 250-400 (competitive to 3 & 4-star hotels)

70-150

Hotel location Close to major business and commercial districts

Typically located in city centres or CBD; rooms and services a quality

comparable to 3 & 4-star hotels

Room size (sq m) 15 15 6-8

Rooms per hotel 120 130 110

Capex per hotel (Rmb mn) 6.6 9.8 5.0

As % of total hotel count

- Current 95 3 2

- Target (in 3-5 years) 73-80 10-12 10-15


Han Ting: Express, Seasons and Hi-inn

7 Days: focus on one format

06 January 2011


Geographical expansion and city tiering As of 3Q10, 7 Day covered 75 cities and Han Ting 55 cities. All of them plan to shift their focus to second and third-tier cities. In particular, 7 Days will have 65% and 55% of their total hotels in second-tier cities, while Han Ting’s hotels are evenly distributed among the three city categories.

Figure 32: Hotel count breakdown by city tiering (2010) Figure 33: Hotel count breakdown by city tiering (target)

35%

50%

55%

25%

10%

25%

0%

10%

20%

30%

40%

50%

60%

7-Day HTHT

1st tier city (BJ, SH, GZ, SZ) 2nd tier city 3rd tier ci ty

(%)

15%

40%

55%

30%30% 30%

0%

10%

20%

30%

40%

50%

60%

7-Day HTHT

1st tier city (BJ, SH, GZ, SZ) 2nd tier city 3rd tier city

(%)

Source: Company data Source: Company data

Segmentation, location, pricing and discounting policy Han Ting is more focused on business travellers and less on leisure travellers, while 7 Days is more balanced.

■ Nearly 70% of Han Ting’s customers are travelling for business and the remaining 30% for leisure. Accordingly, most of their hotels are either near central business districts (CBD), or can easily access them. Han Ting charges a slightly higher room rate.

■ 7 Days targets the young generation, who spend more time searching on the internet and online shopping. Nearly 55% of its customers are travelling for leisure purposes, while the remaining 45% are for business. Compared with the other two, 7 Days’ hotel locations have less of a premium and the hotel room rates are about 5-30% lower.

7 Days capitalises on its membership scheme and online booking system more and in a efficient way. As of 3Q10, 97% of 7 Days’ customers are its club members, compared with nearly 30% for Han Ting. Some 70% of 7 Days’ customers reserve hotel rooms through the company’s online booking system, compared with 15-20% for Han Ting. As a result, 7 Days’ sales and marketing expenses as a percentage of net revenue amounted to 2.4% in 2010, compared with Han Ting’s 4.1%.

Figure 34: Peer comparison: customers breakdown by membership By membership (%) HTHT 7-Day

- Individual (leisure + bus. trips) 62 97

- Corporate 12 -

- Non-membership 26 3


Han Ting: more business style

7 Days: younger look

06 January 2011


Figure 35: Peer comparison: hotel room reservation method Breakdown by referral (%) Han Ting 7 Days

- Agency 5 Less than 1

- Online booking 15-20 70

- Call centre 10-15 10

- Walk-in 15

- Call hotel

19

- Corp contract

- Others (mobile)

45-55

n.a


■ We compared the three players’ standard room rates in the same area to make a like-for-like comparison. In our view, Han Ting charges a high price, mainly for better locations and decoration. 7 Days offers more competitive prices at the expense of hotel location.

Figure 36: Peer comparison: like-for-like listing price 徐家汇店南京路店大木桥店张江店

Xu-jia-hui Naning Road Da-mu-qiao Zhangjiang

CBD/shopping Shopping Residential Residential

Han Ting (Rmb) 299 319 239 279

7 Days (Rmb) 208 288 228 208

Han Ting vs 7 Days (%) 43 11 5 34

Note: Price for standard room, as of 12 December 2010; Source: Company data

■ Compared with Han Ting, 7 Days has a simple and standard discounting policy, which makes it easy to manage agency’s expectations and hotel room rates across the whole country.

Figure 37: Peer comparison: discounting policy (%) Han Ting 7 Days

- Regular membership card 8% 10-15% (Rmb20)

- Premium/Golden membership 12% + free breakfast 10-15% + points/benefits

- Agent 5%

- Agent (Ctrip) 5% +10%

- Corp rate n.a


Figure 38: Average daily rate for LO hotels (Rmb) Figure 39: Average daily rate for FM hotels (Rmb)

150

160

170

180

190

200

2005 2006 2007 2008 2009 2010E 2 011E 2 012E

7 D ays H an T ing

(R m b)

120

140

160

180

200

2005 2006 2007 2008 2009 2010E 2 011E 2 012E

7 D ays H an T ing

(R mb )

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Like-for-like comparison

Discounting policy

06 January 2011


Inflation: inevitably hurts margins We believe inflation is a major headwind for the economy hotel sector, given all of them are operating on an asset-light strategy. In general, the branded economy hotel operators are able to raise room rates by nearly 2-5% per annum to offset inflation. However, it is not easy to fully pass on the inflation pressure to end-consumers in a high inflation period.

Our sensitivity analysis suggests that an additional 100 bp increase in hotel operating expense leads to a 2.2% adjusted EBITDA decline for 7 Days and 2.1% for Han Ting in 2011.

Figure 40: Major cost components: hotel operating expense as a % of net revenue (2009)

30.8%

17.9%

12.7%

7.9%

5.2%

10.6%

33.2%

13.4%11.2%

7.1%

9.4%

5.2%

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

Rent

s

Pers

onne

l cos

ts

D&A

Utilit

ies

Con

sum

able

s an

dF&

B Oth

ers

- 7 Days - Han Ting

(%)


Rental remains the key cost component for all hotels, representing 26-32.5% of the gross revenue of leased-and-operated hotels in 2009. For existing hotels, the rental volatility and forecast risk is lower, because, in general, all of these hotels sign 10 to 20-year contracts, with a fixed rate hike of 3-5% for every three to five years (implying a 1% increase per annum). However, when hotel operators renew contracts or open a new hotel, the rental is likely to be 10-20% higher than the old hotels in the same area.

We attribute Han Ting’s relatively higher rental ratio to its better location.

Figure 41: Peer comparison – rental Rental 7-Day HTHT

- As a % of LO revenue (2009) 29.3 32.5

- Contract duration 10-15 years 10-20 years

- Rate hike 1% p.a (3-5% for every 3-5 years) 1% p.a (3-5% for every 3-5 years)

- Depreciation method Straight line Straight line


Labour is the second-largest cost component. We think it is more vulnerable, given the Chinese government’s plans to raise labour wages, especially for the low-income level category.

We attribute Han Ting’s relatively lower labour ratio to its higher operation efficiency (its staff-to-room ratio is 17% lower than peers which shares similar segmentation; and is slightly higher than 7 Days’).

Han Ting’s earnings are least sensitive to operating cost hikes

Rental – the key cost component, but relatively steady

Labour – the second-largest cost component, volatile due to policy risk

06 January 2011


We are modelling a 5-8% wage increase for both Han Ting and 7 Days.

Figure 42: Peer comparison: labour as a % of LO sales

(2009)

Figure 43: Peer comparison: staff-to-room ratio

17.0%

13.1%

10.0%

11.0%

12.0%

13.0%

14.0%

15.0%

16.0%

17.0%

18.0%

7 Days Han Ting

1.80

1.10

0.55

0.25 0.24

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

HSH

Shan

gri-l

a

Kosm

opol

ito

Han

Tin

g

7 Da

ys

Source: Company data Source: Company data

Investment cycle and breakeven period Based on their similar business models and strategy, 7 Days and Han Ting have similar investment cycles: four to six months to convert a property into a hotel and another six months to achieve an occupancy rate of 80-90%.

Han Ting’s pre-opening expense and capex for each leased hotel is higher, but it also charges a higher room rate. Han Ting also requires a higher IRR and shorter cash-basis breakeven period.

Figure 44: Investment cycle and breakeven period comparison Investment cycle 7-Day HTHT

• Conversion (property -> hotel, incl. construction, renovation and license approval)

< 6 months 6 months

• Ramp-up (opening -> mature) 6 months to reach 80% occupancy rate 6 months to reach 90% occupancy

Break-even period 7-Day HTHT

• Cash-basis / EBITDA breakeven 7-8 months 3 months

• Payback period 4-5 years 4-5 years

• IRR (%) 15-20 20-30


06 January 2011


Management profile Figure 45: Company background at a glance 7 Days Han Ting

Establishment March 2005 April 2005

Listing year November 2009 March 2010

Current hotel count 461 368

- LO hotel 281 200

- FM hotel 180 168

Current city coverage 75 55

Founder background Boquan He: 49, founder & CEO of Robust Group Qi Ji: 43, co-founder of Ctrip

Nanyan Zheng: Founder& CEO, 41, ex-Ctrip marketing and SOE John Wu: 42, ex-VC, Alibaba, Oracle & Yahoo

Tongtong Zhao: 43, ex-health tech, hi-tech and science & tech

Management profile Nanyan Zheng: Founder & CEO, 41, ex-Ctrip marketing and SOE Qi Ji: Chairman, 43, co-founder of Ctrip

Harry Zhang: COO, 41, ex-Wal-Mart, ParknShop Matthew Zhang: CEO, 44, ex-IJIAS, Kasen, OBI

Eric Wu: CFO, 37, ex-PWC Jenny Zhang: CFO, 36, ex-Eli Lily, ASIMCO, McKinsey

Yuezhou Lin: CIO, 39, ex-Wanxun Computer Software


Sensitivity analysis Figure 46: Sensitivity analysis – 2011 earnings change on 100 bp operating expense hike Base case Case 1 Change (%)

Net revenue (Rmb mn)

- 7 Days 2,019 2,019 0.0

- Han Ting 2,434 2,434 0.0

Adj. EBITDA (CS)

- 7 Days 591 578 -2.2

- Han Ting 716 701 -2.1

Adj. net profit (CS)

- 7 Days 230 219 -5.1

- Han Ting 244 230 -5.4

Adj. EBITDA margin (CS) (%)

- 7 Days 29.3 28.6 -0.7

- Han Ting 29.4 28.8 -0.6

Adj. net margin (CS) (%)

- 7 Days 11.4 10.8 -0.6

- Han Ting 10.0 9.4 -0.5


06 January 2011


Figure 47: Sensitivity analysis – 2011 earnings change on 10 additional hotel openings Base case Case 1 Change (%)


- 7 Days 2,019 2,031 0.6

- Han Ting 2,434 2,454 0.8

Adj. EBITDA (CS)

- 7 Days 591 598 1.0

- Han Ting 716 723 1.1


- 7 Days 230 233 1.1

- Han Ting 244 244 0.6


- 7 Days 29.3 29.4 0.1

- Han Ting 29.4 29.5 0.1

Adj. net margin (CS) (%)

- 7 Days 11.4 11.5 0.1

- Han Ting 10.0 10.0 0.0


Figure 48: Sensitivity analysis – 2011 earnings change on 1% occupancy rate decrease Base case Case 1 Change (%)


- 7 Days 2,019 1,997 -1.1

- Han Ting 2,434 2,409 -1.0

Adj. EBITDA (CS)

- 7 Days 591 572 -3.3

- Han Ting 716 693 -3.2


- 7 Days 230 216 -6.2

- Han Ting 244 227 -7.0


- 7 Days 29.3 28.6 -0.7

- Han Ting 29.4 28.8 -0.6

Adj. net margin (CS)

- 7 Days 11.4 10.8 -0.6

- Han Ting 10.0 9.4 -0.6


06 January 2011


Growth quality remains key A fundamental scorecard to measure growth quality When we pick the best company from a fast-growing sector, growth quality remains our priority. Here, we run our fundamental scorecard to assess the two companies' growth momentum, growth quality, earnings sensitivity to inflation and expansion pace, and management quality. Our conclusions include:

■ 7 Days outperform Han Ting in new hotel opening pace. Based on its strong online booking system and club membership scheme, the company is able to rapidly replicate its low-priced hotels cross China. 7 Days has more upside risk in new hotel expansion. Its cost structure also requires lower breakeven occupancy, leaving it more defensive in an economic down-cycle.

■ Han Ting outperforms 7 Days in translating hotel expansion into earnings growth. In terms of adjusted core EBITDA and net earnings growth, EBITDA and net margins, as well as normalised ROE, Han Ting outperforms 7 Days. Han Ting is less vulnerable to being hurt by inflation based on its higher profitability.

Figure 49: A fundamental scorecard – Part 1: growth profile Part 1: Growth profile (%) 7 Days Han Ting Who stands out?

Hotel count CAGR 2009-12E 44.5 53.6 Han Ting

- LO hotel 26.3 35.8 Han Ting

- FM hotel 75.0 88.7 Han Ting

Hotel count CAGR 2010-15E 31.0 28.9 7 Days

- LO hotel 20.8 26.8 Han Ting

- FM hotel 42.3 31.3 7 Days

Net revenue CAGR 2009-12E 31.5 38.7 Han Ting

Net revenue CAGR 2010-15E 25.2 29.8 Han Ting

Adjusted core EBITDA CAGR 2009-12E 45.1 56.9 Han Ting

Adjusted core EBITDA CAGR 2010-15E 29.2 31.9 Han Ting

Reported net earnings CAGR 2009-12E 43.9 107.5 Han Ting

Reported net earnings CAGR 2010-15E 36.7 39.2 Han Ting

Adjusted core net earnings CAGR 2009-12E 218.9 99.2 7 Days

Adjusted core net earnings CAGR 2010-15E 36.5 38.3 Han Ting


Growth quality: our stock-pick priority

06 January 2011


Figure 50: A fundamental scorecard – Part 2: growth quality Part 2: Growth quality (2011E) 7 Days Han Ting Who stands out?

2011 Net revenue (Rmb mn) 2,019 2,434 Han Ting

2011 Adj. core EBITDA (Rmb mn) 591 716 Han Ting

2011 Adj. core net earnings (Rmb mn) 230 243 Han Ting

2011 Adj. core net earnings ex. pre-opening exp. (Rmb mn) 284 369 Han Ting

Occupancy for LO hotels (%) 90.0 95.0 Han Ting

Average room rate for LO hotels (Rmb) 164 184 Han Ting

RevPAR for LO hotels (Rmb) 148 174 Han Ting

Daily net revenue per LO room (Rmb) 144 175 Han Ting

Daily adj. core EBITDA per LO room (Rmb) 40 50 Han Ting

Daily adj. core net earnings per LO room (Rmb) 17 21 Han Ting

Adj. core EBITDA margin for LO hotel (%) 28.0 28.3 Han Ting

Adj. core net margin for LO hotel (%) 11.8 12.2 Han Ting

Net revenue contribution by FM hotels (%) 7.5 7.9 Han Ting

Adj. core EBITDA contribution by FM hotels (%) 11.7 11.4 7 Days

Adj. core net earnings contribution by FM hotels (%) 22.5 25.2 Han Ting

Overall adj. core EBITDA margin (%) 29.3 29.4 Han Ting

Overall adj. core net margin (%) 11.4 10.0 7 Days

RoE (%) 15.2 12.6 7 Days

RoA (%) 10.8 9.1 7 Days

Normalised RoE – ex. pre-opening exp. (%) 18.7 19.2 Han Ting

Normalised RoA – ex. pre-opening exp. (%) 13.3 13.9 Han Ting

Net gearing (%) (negative = net cash position) -46.2 -45.5 7 Days

Sensitivity (adjusted core EBITDA)

- On 100 bp hotel operation expense hikes down 224.5 bps down 207.2 bps Han Ting

- On 10 new hotel openings up 104.9 bps up 105.1 bps Han Ting

Breakeven occupancy level (%)

- On adj. core EBITDA basis 60.0 63.0 7 Days

- On adj. net earnings basis 75.0 81.0 7 Days


Figure 51: A fundamental scorecard – Part 3: Management assessment 7 Days Han Ting

Operating history 5 years (2005.3) 5 years (2005.4)

Management style Aggressive but focus Balanced and solid

Business risk Relatively higher Relatively lower


06 January 2011


Key performance indicator comparison Figure 52: Peer comparison – hotel count 2005 2006 2007 2008 2009 2010E 2011E 2012E

# of hotels in operation (period-end)

7 Days 5 24 106 223 337 507 757 1,017

Han Ting 26 67 167 236 426 636 856

# of LO hotels

7 Days 5 23 103 206 236 306 386 476

Han Ting 24 62 145 173 233 323 433

# of FM hotels

7 Days 0 1 3 17 101 201 371 541

Han Ting 2 5 22 63 193 313 423

LO hotels as % of total

7 Days 96 97 92 70 60 51 47

Han Ting 92 93 87 73 55 51 51


Figure 53: Peer comparison – occupancy rate Occupancy rate (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E

Total hotels in operation

7 Days 68 93 88 88 88 88 86 86

Han Ting 85 87 94 93 93 92

LO hotels

7 Days 68 93 88 88 89 91 90 90

Han Ting 85 89 94 96 95 94

FM hotels

7 Days 0 90 84 83 83 83 82 83

Han Ting 82 74 91 91 91 90


Figure 54: Peer comparison – average daily rate (Rmb) Average daily rate (Rmb) 2005 2006 2007 2008 2009 2010E 2011E 2012E


7 Days 182 163 158 160 160 159 160 163

Han Ting 181 178 174 189 179 184

LO hotels

7 Days 182 166 159 160 160 162 164 167

Han Ting 181 178 174 193 184 189

FM hotels

7 Days 105 133 151 156 154 156 159

Han Ting 176 180 172 183 174 179


06 January 2011


Figure 55: Peer comparison – RevPAR (Rmb) RevPAR (Rmb) 2005 2006 2007 2008 2009 2010E 2011E 2012E


7 Days 124 152 139 141 141 140 138 140

Han Ting 154 156 163 176 166 170

LO hotels

7 Days 124 155 140 142 143 148 148 150

Han Ting 154 158 165 185 174 178

FM hotels

7 Days 94 112 126 129 128 128 132

Han Ting 145 132 156 166 158 161


Figure 56: Peer comparison – hotel operation expense as % of LO gross revenue (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E

Total operation expense

7 Days 95.6 80.8 78.4 79.5 77.7

Han Ting 92.0 86.2 77.9 70.8 73.9 72.9

1) Rents

7 Days 38.7 29.3 29.3 29.7 29.1

Han Ting 37.9 33.0 32.5 30.4 31.8 31.5

2) Personnel costs

7 Days 21.6 17.0 16.1 17.1 16.8

Han Ting 13.9 17.2 13.1 10.9 12.1 12.0

3) Dep & Amo

7 Days 11.6 12.0 12.6 12.3 11.9

Han Ting 13.4 11.6 11.0 11.2 11.4 11.1

4) Utilities

7 Days 7.5 7.5 7.5 7.6 7.4

Han Ting 7.6 7.5 7.0 6.5 6.8 6.8

5) Consumables, F&B

7 Days 6.5 4.9 4.4 4.5 4.4

Han Ting 14.3 10.4 9.2 7.7 7.7 7.6

6) Others

7 Days 9.7 10.1 8.5 8.4 8.2

Han Ting 5.0 6.5 5.1 4.1 4.1 4.1


06 January 2011


Figure 57: Peer comparison – overall operation expense as % of net revenue (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E

1) Hotel operating cost 7 Days 106.4 107.5 108.1 101.2 85.1 78.4 77.9 76.0 Han Ting 97.0 89.9 79.7 70.0 72.1 71.2 Rents 7 Days 50.9 48.8 51.8 41.0 30.8 29.3 29.1 28.4 HanTing 40.0 34.5 33.2 30.1 31.0 30.7 Utilities 7 Days 9.1 7.8 7.5 8.0 7.9 7.5 7.4 7.2 HanTing 8.0 7.8 7.1 6.5 6.7 6.6 Personnel costs 7 Days 16.7 18.7 19.4 22.9 17.9 16.1 16.8 16.4 HanTing 14.6 18.0 13.4 10.8 11.8 11.7 Dep. & amort. 7 Days 10.4 10.2 10.6 12.3 12.7 12.6 12.1 11.6 HanTing 14.1 12.1 11.2 11.0 11.1 10.8 Consumables, F&B 7 Days 13.1 10.5 8.6 6.8 5.2 4.4 4.4 4.3 HanTing 15.1 10.8 9.4 7.6 7.5 7.4 Others 7 Days 6.2 11.4 10.1 10.2 10.6 8.5 8.2 8.0 HanTing 5.2 6.8 5.2 4.1 4.0 4.0 2) Sales & mkting exp. (%) 7 Days 20.5 7.6 5.4 5.1 2.7 2.4 2.1 2.0 Han Ting 7.5 5.3 4.6 4.1 4.1 3.9 3) G&A exp. 7 Days 159.9 22.1 22.2 13.0 5.7 7.4 7.2 7.1 Han Ting 27.9 10.7 6.6 6.7 6.2 6.0 (1+2+3) as % of net rev. 7 Days 286.7 137.2 135.7 119.3 93.5 88.2 87.2 85.1 Han Ting 158.4 120.1 93.9 86.0 87.5 84.9 4) Pre-opening exp. 7 Days 0.0 53.6 21.7 5.5 2.6 3.0 2.7 2.4 Han Ting 25.9 14.1 3.0 5.1 5.2 3.9 5) SBC expense 7 Days 2.2 3.2 6.2 3.8 1.0 1.1 1.7 1.6 Han Ting 6.3 0.6 0.6 0.7 0.6 0.6


Figure 58: Peer comparison – daily net revenue per room (Rmb) 2005 2006 2007 2008 2009 2010E 2011E 2012E

Total (blended) 7 Days 93 98 117 113 99 88 80 Han Ting 80 144 140 122 106 105 LO hotel 7 Days 97 102 124 140 141 144 147

Han Ting 85 159 167 176 175 179

FM hotel 7 Days 0 0 4 4 16 15 12

Han Ting 6 20 25 23 19 18

LO hotel/ FM hotel (x) 7 Days 35 36 9 10 12

Han Ting 14 8 7 8 9 10


06 January 2011


Figure 59: Peer comparison - Daily adjusted core EBITDA per room (Rmb) 2005 2006 2007 2008 2009 2010E 2011E 2012E

Total (blended) 7 Days 28 3 3 26 28 26 25 Han Ting -10 10 29 38 31 32 LO hotel 7 Days 30 4 4 33 39 40 44 Han Ting -9 11 34 53 50 53 FM hotel 7 Days -28 -27 -18 -6 6 7 5 Han Ting -22 -3 9 10 8 7 LO hotel/ FM hotel (x) 7 Days -1 0 0 -6 6 6 9 Han Ting 0 -4 4 5 6 7

Adjusted core EBITDA / net revenue (%) Total (blended) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days 30 3 2 23 29 29 31 Han Ting -12 7 21 31 29 30 LO hotel 7 Days 31 4 3 24 28 28 30 Han Ting -10 7 20 30 28 29 FM hotel 7 Days -502 -144 40 46 41 Han Ting -356 -16 37 42 42 41


Figure 60: Peer comparison – Daily adjusted core net profit per room (Rmb) 2005 2006 2007 2008 2009 2010E 2011E 2012E

Total (blended) 7 Days 18 -8 -12 11 15 12 11 Han Ting -18 -7 10 19 15 15 LO hotel 7 Days 20 -7 -12 16 20 17 19 Han Ting -18 -7 11 26 21 24 FM hotel 7 Days -28 -28 -18 -6 6 5 4 Han Ting -19 -3 7 8 6 5 LO hotel/ FM hotel (x) 7 Days -1 0 1 -3 3 3 5 Han Ting 1 3 2 3 4 4

Adj. net profit margin (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E Total (blended) 7 Days 20 -8 -10 10 15 14 14 Han Ting -23 -5 7 16 14 15 LO hotel 7 Days 21 -7 -9 11 14 12 13 Han Ting -21 -4 6 14 12 13 FM hotel 7 Days -515 -144 38 36 31 Han Ting -309 -13 28 33 32 31


Figure 61: Peer comparison – effective tax rate (%) (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E

7 Days -1 -3 -3 0 5 21 25 25 Han Ting 13 15 26 21 25 25


06 January 2011


Figure 62: Peer comparison – net earnings (reported, GAPP standard) Net earnings (Reported) (Rmb mn) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days -26 -21 -123 -211 -104 141 195 292 Han Ting -112 -136 43 198 227 380 Net earnings YoY (%) 7 Days n.a n.a n.a n.a n.a n.a 38 50 Han Ting n.a n.a n.a n.a n.a 366 15 67 Net margin (%) 7 Days -187.2 -39.2 -48.5 -29.2 -9.1 9.4 9.7 11.3 Han Ting -47.4 -17.8 3.4 11.3 9.3 11.3


Figure 63: Peer comparison – adjusted net earnings (non-GAAP, based on company standard) Adj. net earnings (reported) (Rmb mn) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days -26 -21 -120 -221 -1 141 195 292 Han Ting -97 -131 50 211 244 399 Net earnings YoY (%) 7 Days n.a n.a n.a n.a n.a n.a 38 50 Han Ting n.a n.a n.a 318 15 64 Net margin (%) 7 Days -39.2 -47.7 -30.6 -0.1 9.4 9.7 11.3 Han Ting -41.2 -17.2 4.0 12.0 10.0 11.9

Note: company standard: 7 Days – taking out non-recurring items from reported GAAP net earnings; Han

Ting – taking out share-based compensation expense from reported GAAP net earnings.


Figure 64: Peer comparison – adjusted net earnings (non-GAAP, based on CS standard) Adj. net earnings (CS) (Rmb mn) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days -26 -20 -105 -194 10 158 230 334 Han Ting -97 -131 50 211 243 399 Net earnings YoY (%) 7 Days n.a n.a n.a n.a n.a 1430 46 45 Han Ting n.a n.a n.a n.a n.a 318 15 64 Net margin (%) 7 Days -185.0 -36.0 -41.5 -26.9 0.9 10.5 11.4 12.9 Han Ting -41.2 -17.2 4.0 12.0 10.0 11.9

Note: CS standard – taking out SBC exp. and other non-recurring items from reported GAAP net earnings


Figure 65: Peer comparison – Net revenue contribution by LO hotels (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days 100 100 100 99 94 93 92 Han Ting 100 99 97 93 92 92


Figure 66: Peer comparison – Adjusted core EBITDA contribution by LO hotels (%) 2005 2006 2007 2008 2009 2010E 2011E 2012E 7 Days 104 133 138 104 92 88 90 Han Ting 86 103 94 91 89 90


Figure 67: Peer comparison – EXPO impact on 2010 earnings and margins 7 Days Han Ting Hotels in Shanghai (as of 3Q10) 28 (15 LO + 13 FM) 80 (44 LO + 36 FM) SH hotel count as % of total hotels (as of 3Q10) (%) 6.1 21.7 After-tax net revenue impact (Rmb mn, 2010) 16 58 Core EBITDA contribution by EXPO (%, 2010) 4.7 13.4 Net margin contribution by EXPO (%, 2010) 1.1 3.3


06 January 2011


Valuation, stock picks and risks Valuation methodology We use a discounted cash flow (DCF) model as our primary valuation methodology for the sector, because we believe it better captures a company’s medium to long-term growth momentum.

■ We assume a WACC of 11.3%, a risk-free rate of 3.5%, a risk premium of 6.5%, a cost of debt of 5.5% and optimal leverage of 15%. This compares with our WACC assumptions of 11.8-13% for China staple and discretionary companies.

■ We assume terminal growth of 2.5% 2025 onwards, as we believe these market leaders stand to continue benefiting from China’s promising and resilient consumption prospects and great industry consolidation potential in the long run. This compares with our assumption of 2.5-3% for China staple and discretionary companies.

We also use an EV/EBITDA multiple to cross-check our DCF-based target prices. Compared with P/E multiples, the EV/EBITDA multiple is a better matrix to value a hotel company based on real and normalised earnings capability and quality.

■ 7 Days and Han Ting are trading at 11.7-13.1x 2011E EV/EBITDA and 8.4-8.5x 2012E EV/EBITDA. Our target prices imply 16.3-16.5x 2011E and 10.9-12.0x 2012E EV/EBITDA. Stripping out pre-opening expense, our implied EV/core EBITDA amounts to 13.6-14.8x for 2011 and 9.5-11.0x for 2012.

■ Shanghai Jinjiang is trading at 17.6x 2011E EV/EBITDA, respectively, based on Bloomberg consensus earnings forecasts.

■ Asian peers trade at higher multiples. Shangri-La and Hong Kong & Shanghai Hotels trade at 16.1x and 17.7x 2011E, and 14.1x and 17.0x 2012E EV/EBITDA. We attribute their higher earnings multiples to their strong brand franchise, decent earnings growth and asset-heavy business models. Kosmopolito trades at 20.0x 2011E and 12.1x 2012E EV/EBITDA, mainly on its strong medium-growth and asset-heavy business model.

■ Global peers trade at lower multiples, mainly due to the slower earnings momentum of their global assets.

■ Compared with the traditional hotels, China’s economy hotels trade at higher P/B and P/E multiples with higher ROE. We think that this is justified by China’s economy hotels not owning property and leveraging on franchisee strategy. This asset-light strategy also fuels their rapid expansion and earnings growth.

Figure 68: Target price derivation and comparison summary Trading Trading EV/core Core Core

Company Ticker Market Trading Target Potential Rat. EV/EBITDA EBITDA EV/room EBITDA EBITDA

cap price price upside 10E 11E 12E 10E 11E 12E 11E 2009-12E 2010-15E

(US$ mn) (US$) (US$) (%) (x) (x) (x) (x) (x) (x) US$’000 CAGR (%) CAGR (%)

7 Days SVN US 1,023 20.58 28.8 40 OP 16.5 11.7 8.4 14.2 10.2 7.6 12.0 45.1 29.2

China Lodging HTHT US 1,344 22.81 26.9 18 OP 17.9 13.1 8.5 14.1 10.7 7.5 15.5 56.9 31.9

Note: EBITDA = GAPP EBITDA – SBC expense – non-recurring items, Core EBITDA = EBITDA – pre-opening expense

Source: Company data, Credit Suisse estimates; ; As of 5 January, 2011

Primary valuation matrix: DCF model

Secondary valuation matrix: EV/EBITDA multiple

Compared with Asian peers

Compared with global peers

Compared with traditional hotels

06 January 2011


Figure 69: Sector valuation comparison BBG Share Mkt P/E (x) EV/EBITDA (x) P/BV (x) ROE (%) 3-yr 11

Company code price cap 10E 11E 12E 10E 11E 12E 10E 11E 12E 10E 11E 12E CAGR PEG

(l.c.) (US$ mn) (x) (x) (x) (x) (x) (x) (x) (x) (x) (%) (%) (x) (%) (x)

China budget hotel

7 Days SVN US 20.58 1,023 43.2 29.6 20.4 16.5 11.7 8.4 4.9 4.2 3.5 11.9 15.2 18.6 45.6 0.3

China Lodging HTHT US 22.81 1,344 44.2 38.2 23.4 17.9 13.1 8.5 5.0 4.4 3.7 22.3 12.7 17.8 37.4 0.4

Average - Budget hotel 43.8 34.5 22.1 17.3 12.5 8.5 5.0 4.3 3.6 17.8 13.8 18.1 40.9 0.3

Global lodging peers

Shangri-La Asia 0069.HK 22.25 8,270 33.3 26.6 23.3 20.3 16.1 14.1 1.9 1.7 1.6 6.0 7.0 7.0 15.5 1.7

HK & Shanghai Hotels* 45 HK 13.70 2,568 42.2 31.0 29.0 21.4 17.7 17.0 0.9 0.9 0.8 2.0 2.7 2.9 20.6 1.5

Shanghai Jinjiang* 600754 CH 23.50 2,243 35.9 36.4 30.0 20.6 17.6 15.0 3.5 3.3 3.2 9.3 9.4 10.5 35.7 1.0

Kosmopolito Hotels 2266.HK 1.76 453 61.2 28.6 14.0 34.6 20.0 12.1 23.0 1.3 1.2 32.0 8.0 9.0 100.0 0.3

Accor ACCP.PA 33.45 10,165 26.4 25.5 22.5 9.8 8.2 7.1 1.7 1.7 1.6 4.0 7.0 7.0 7.8 3.3

InterContinental Hotels IHG.L 1,303 5,703 21.1 18.3 16.2 12.2 10.6 9.2 16.7 10.8 7.7 87.0 58.0 47.0 14.5 1.3

Whitbread WTB.L 1,832 5,028 18.9 15.9 13.9 11.6 10.0 8.9 2.9 2.6 2.3 14.0 16.0 17.0 17.7 0.9

Millennium & Copthorne MLC.L 587.00 2,856 21.7 16.5 14.6 11.0 8.9 7.7 1.0 1.0 0.9 5.0 6.0 6.0 22.5 0.7

Rezidor Hotel REZT.ST 39.90 917 107.2 33.1 19.1 18.0 10.4 7.4 4.0 3.6 3.1 1.0 6.0 0.0 134.5 0.2

Average – Global lodging 29.7 24.0 20.7 14.7 11.9 10.4 4.5 3.2 2.6 18.7 15.6 14.0 19.5 1.8

Source: Bloomberg*, Company data, Credit Suisse estimates; ; As of January 5, 2011

Stock picks Figure 70: Stock pick summary – positives, negatives, catalysts and valuation Company Rating TP (US$) Upside Valuation Positives Negatives Catalysts

7 Days O 28.8 40% • Trades at 11.7x EV/EBITDA

• Business model easy to replicate across China

• Vulnerable under an inflationary environment

• Stronger YoY/QoQ travel growth data

Target EV/room = US$ 17.4K • Target at 16.3x EV/EBITDA

• Strong booking system and membership to lower SG&A

• Execution risk due to fast expansion

• Faster openings than market expected

• Defensive in down-cycle

China Lodging

O 26.9 18% • Trade at 13.1x EV/EBITDA

• Strong in translating expansion into earnings growth

• Narrower city coverage • Ugly YoY travel data

(Han Ting) Target EV/room = US$ 19.8K • Target at 16.5x

EV/EBITDA

• Earnings less sensitive to

inflation impact

• Post-Expo slowdown • Faster openings than

market expected • Solid management, balance

growth and quality

Source: Credit Suisse estimates; ; As of January 5, 2011

Figure 71: Stock pick summary – trading vs target valuation comparison Trading multiples

Trading Trading EV/EBITDA Trading EV/core EBITDA EV/room

price 10E 11E 12E 10E 11E 12E 11E

US$ (x) (x) (x) (x) (x) (x) US$ '000

7 Days 20.58 16.5 11.7 8.4 14.2 10.2 7.6 12.0

China Lodging 22.81 17.9 13.1 8.5 14.1 10.7 7.5 15.5

Target price implied multiples

Target Implied EV/EBITDA Implied EV/core EBITDA EV/room

price 10E 11E 12E 10E 11E 12E 11E

US$ (x) (x) (x) (x) (x) (x) US$ '000

7 Days 28.8 22.9 16.3 12.0 20.5 14.8 11.0 17.4

China Lodging 26.9 21.5 16.5 10.9 17.9 13.6 9.5 19.8

Source: Company data, Credit Suisse estimates; ; As of January 5, 2011

06 January 2011


■ We initiate coverage on 7 Days with an OUTPERFORM rating and a target price of US$28.8 (implying 40% upside). We like 7 Days’ simple and focused strategy, which enables the company to replicate its business model across the country rapidly. As a result, we expect more upside earnings forecast risk on 7 Days, if the company is able to deliver a faster-than-expected new hotel opening. We also like 7 Days’ strong competency in online booking systems and club membership schemes, which makes the company reach out to its target consumer more accurately and save sales and marketing expense.

Given its low-priced strategy, 7 Days’ earnings are more vulnerable to inflation. In addition, a fast expansion in new markets requires strong execution skills, and more reliance on franchise model leads to higher execution risks. However, 7 Days has a lower breakeven occupancy level, leaving it more defensive in an economic down-cycle.

7 Days is trading at 11.7x and 8.4x EV/EBITDA, for 2011 and 2012, respectively. Our target price of US$28.8 implies 16.3x and 12x EV/EBITDA.

■ We initiate coverage on Han Ting (China Lodging) with an OUTPERFORM rating and a target price of US$26.9 (implying 18% upside). We like Han Ting for its stronger capability in translating rapid new hotel expansion into strong earnings growth. In terms of core earnings growth, core EBITDA margin and core ROE, Han Ting stands out from its peers. Given the higher margin, Han Ting is more defensive in an inflationary environment. We also like Han Ting management’s solid style. It is hands-on and balances growth momentum and growth quality.

Han Ting has more exposure in Shanghai, and hence, benefited more from the 2010 EXPO when hotel room rates almost doubled. We have factored in the post-EXPO slowdown into our modelling. However, the market is likely to overreact when year-on-year travel data comes in and when comparing Han Ting with 7 Days which has fewer hotels in Shanghai. Taking out the EXPO impact (which could be perceived as a one-time bonus), the company’s real earnings power and quality remain intact, in our view. In addition, compared with 7 Days, Han Ting’s city coverage is smaller, resulting in downside risk to Han Ting’s margin when it raises its exposure in second and third cities.

Han Ting is trading at 13.1x and 8.5x EV/EBITDA, for 2011 and 2012, respectively. Our target price of US$26.9 implies 16.5x and 10.9x EV/EBITDA.

Figure 72: Share price movement summary 2010

(%) 2006 2007 2008 2009 Jan-Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sept 10 Oct 10 Nov 10 Dec 10 YTD

7 Days n.a. n.a. n.a. 13 -17 1 13 -8 0 29 26 12 18 -14 64

Han Ting n.a. n.a. n.a. n.a. n.a. 1 -5 6 22 14 12 4 -2 -15 65

Source: Bloomberg

7 Days’ positives

7 Days’ negatives

Han Ting’s positives

Han Ting’s negatives

06 January 2011


Figure 73: P/E band – 7 Days Figure 74: EV/EBITDA band – 7 Days

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Figure 75: P/E band – Han Ting Figure 76: EV/EBITDA band – Han Ting

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Source: Bloomberg, Credit Suisse estimates Source: Bloomberg, Credit Suisse estimates

Sector investment risks ■ Outbreak of epidemics and natural disasters. These could materially and

negatively affect the hotel industry’s operational and financial performance. In 2009, cases of swine influenza were confirmed in numerous countries, including China and other parts of Asia. In 2005 and 2006, there were reports of avian influenza in various parts of China, including a few confirmed human cases and deaths. In early 2003, several economies in Asia, including China, were affected by the outbreak of SARS. During May and June of 2003, many businesses in China were closed by the Chinese government to prevent transmission of SARS.

Any prolonged recurrence of such contagious disease or other adverse public health developments in China may have a material and negative effect on hotel operations.

■ Operational leverage and inflation. This remains a system risk. A significant portion of hotel operating costs, including rents and labour costs, is fixed and relatively constant. However, there is seasonality in travel traffic. In general, the first quarter is low season, especially due to the spring festival holidays and winter time, while the third quarter could be the peak season, driven by the summer holiday and school

06 January 2011


break. In addition, during the three to six-month ramp-up stage for the new hotels, traffic and occupancy are generally low, resulting in profit loss.

The possible further rises in rental and labour costs, the two critical cost components, are likely to squeeze economy hotels’ margins, given the difficulty in fully passing on inflation to end-consumers.

■ Rapid expansion requires higher execution skills in management, operation and technology, in order to deliver consistent hotel products and services. As each of the leading players plans to open more than 200 new hotels every year, talent recruiting and maintenance could be one of the critical areas to remain continuing growth quality. In addition, the hotel operators’ capability to successfully identify, secure and develop additional hotel properties in a timely fashion also has an impact on growth momentum and quality.

■ Global and domestic economic development has a positive co-relationship with economy hotels’ operational and financial performances, though we believe the sensitivity of the economy hotel segment is lower than that for the upscale hotel segment.

06 January 2011


Asia Pacific / China Lodging

China Lodging Group (HTHT.OQ / HTHT US)

Translating expansion into earnings growth ■ China’s fifth-largest economy hotel operator with a 7.8% market share:

China Lodging (Han Ting) operated 368 hotels in 55 Chinese cities, as of 3Q10. Franchised hotels accounted for 46% of total hotels and management targets 50% in the future. Han Ting has a diversified branding strategy: Han Ting Express (the mass segment), Seasons (the mid-scale segment) and Hi-inn (the low-priced segment). It plans to adjust the brand mix from 94:4:2 to 76:11:13 in three to five years’ time. Han Ting targets a relatively even geographical distribution for its hotels in first, second and third-tier cities.

■ A good balance in growth momentum and growth quality: We estimate Han Ting’s adjusted core EBITDA will experience a 57% CAGR over 2009-12 and 32% in 2010-15E, outpacing 7 Days’. Han Ting achieves a higher occupancy rate, RevPAR, core EBITDA and net margin, despite charging higher room rates. Han Ting’s earnings are less vulnerable under an inflationary environment. We expect Han Ting’s stronger capability in translating hotel expansion into earnings growth to further underpin its long-term growth.

■ Investment risks and catalysts: As of 3Q10, 22% of Han Ting’s total hotels were in Shanghai (versus 7 Days’ 6%), where the room rate rocketed 40-50% during the six-month long EXPO event. We estimate the EXPO brought in 13% core EBITDA accretion and 330 bp GAAP net margin enhancement. Although consensus estimates have factored in a post-EXPO slowdown, the market is likely to overreact to the forthcoming weak QoQ travel data. We believe the possible price dip would create buying opportunities.

■ Initiate coverage with an OUTPERFORM: Assuming a WACC of 11.3% and terminal growth of 2.5%, our DCF-based target price of US$26.9 suggests 18% upside and implies 16.5x 2011 EV/EBITDA and 13.6x 2011 EV/core EBITDA (excluding pre-opening expense). Han Ting trades at 13.1x 2011E EV/EBITDA, compared with 7 Days’ 11.7x, Shangri-La’s 16.1x, Hongkong Shanghai Hotel’s 17.7x and Kosmopolito’s 20.0x.

Share price performance

010203040

Mar-10 Jul-10 Nov-10

100120140160180

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI China Free index which closed at 68.29 on 05/01/11 On 05/01/11 the spot exchange rate was US$1./US$1

Performance Over 1M 3M 12M Absolute (%) -0.18 -0.83 — Relative (%) -0.7 -2.7 —

Financial and valuation metrics

Year 12/09A 12/10E 12/11E 12/12E Revenue (Rmb mn) 1,260.2 1,755.5 2,433.9 3,365.2 EBITDA (Rmb mn) 229.9 453.5 589.8 890.0 EBIT (Rmb mn) 84.4 259.6 319.1 525.3 Net income (Rmb mn) 50.5 211.2 244.4 399.4 EPS (CS adj.) (Rmb) 1.10 3.41 3.95 6.45 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 3.80 3.75 6.68 EPS growth (%) n.a. 210.2 15.7 63.4 P/E (x) 137.0 44.2 38.2 23.4 Dividend yield (%) — — — — EV/EBITDA (x) 38.0 17.9 13.1 8.5 P/B (x) — — — — ROE 172.2 22.3 12.7 17.8 Net debt/equity (%) net cash net cash net cash net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Kevin Yin 852 2101 7655

[email protected]

Rating OUTPERFORM* [V] Price (05 Jan 11, US$) 22.81 Target price (US$) 26.90¹ Chg to TP (%) 17.9 Market cap. (US$ mn) 1,344 (US$ 1,344) Enterprise value (Rmb mn) 8,102 Number of shares (mn) 58.90 Free float (%) — 52-week price range 27.07 - 13.90

06 January 2011


Figure 77: Income statement (HTHT.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Gross revenue 249 810 1,334 1,858 2,576 3,561

Gross revenue growth (%) 224.7 64.7 39.3 38.6 38.3

- Leased-and operated hotels 221 62 35 37 39

- Franchised-and-managed hotels 895 273 171 67 35

Gross revenue mix (%) 100.0 100.0 100.0 100.0 100.0 100.0

- Leased-and operated hotels 99.5 98.5 96.6 93.4 92.1 92.3

- Franchised-and-managed hotels 0.5 1.5 3.4 6.6 7.9 7.7

Net revenues 235 764 1,260 1,755 2,434 3,365

Net revenue growth (%) 224.8 64.9 39.3 38.6 38.3

Operating costs & expenses

1) Hotel operating cost (228) (687) (1,004) (1,229) (1,754) (2,398)

As % of LO gross revenue 92.0 86.2 77.9 70.8 73.9 72.9

- Rents 37.9 33.0 32.5 30.4 31.8 31.5

- Utilities 7.6 7.5 7.0 6.5 6.8 6.8

- Personnel costs 13.9 17.2 13.1 10.9 12.1 12.0

- Dep. and amort. 13.4 11.6 11.0 11.2 11.4 11.1

- Consumables, F&B 14.3 10.4 9.2 7.7 7.7 7.6

- Others 5.0 6.5 5.1 4.1 4.1 4.1

Hotel operating cost mix 100.0 100.0 100.0 100.0 100.0 100.0

- Rents 41.2 38.3 41.7 42.9 43.0 43.2

- Utilities 8.2 8.7 9.0 9.2 9.2 9.3

- Personnel costs 15.1 20.0 16.8 15.4 16.3 16.4

- Dep. and amort. 14.6 13.5 14.1 15.8 15.4 15.2

- Consumables, F&B 15.6 12.0 11.9 10.9 10.4 10.4

- Others 5.4 7.5 6.6 5.8 5.6 5.6

2) Sales & marketing exp (18) (41) (58) (72) (100) (131)

3) G&A expenses (66) (82) (84) (118) (151) (200)

4) Pre-opening expense (61) (108) (38) (90) (126) (130)

Total operating costs and exp (373) (918) (1,184) (1,509) (2,130) (2,859)

Op. exp. as % of net revenue

1) Hotel operating cost (%) 97.0 89.9 79.7 70.0 72.1 71.2

2) Sales & marketing exp. (%) 7.5 5.3 4.6 4.1 4.1 3.9

3) G&A expenses (%) 27.9 10.7 6.6 6.7 6.2 6.0

4) Pre-opening expense (%) 25.9 14.1 3.0 5.1 5.2 3.9

Total op. exp. as % of net revenue 158.4 120.1 93.9 86.0 87.5 84.9

Income from operations (137) (154) 76 247 304 507

Adj. EBITDA (reported) (35) 42 249 536 702 1,004

Adj. EBITDA (CS) (89) (56) 226 453 590 890

- EBITDA YoY (%) -37.3 -503.5 100.7 30.1 50.9

- EBITDA margin (%) -37.9 -7.3 17.9 25.8 24.2 26.4

Profit before tax (131) (156) 69 258 311 516

- Effective tax rate (%) 13.2 15.3 25.9 21.0 25.0 25.0

Net earnings (GAAP) (112) (136) 43 198 229 381

Net earnings (GAAP, ex. EXPO impact) 43 141 229 381

- Net profit increase YoY (%) 230 63 66

- Net margin (GAAP) 3.4 8.0 9.4 11.3

Adj. net earnings (Reported) (97) (131) 50 211 244 399

- Net earnings increase YoY (%) 35.6 -138 318.2 15.7 64.3

- Net margin -41.2 -17.2 4.0 12.0 10.0 11.9

Adj. net core earnings (CS) (97) (131) 50 211 244 399

- Net earnings increase YoY (%) 35.6 -138 318.2 15.7 64.3

- Net margin -41.2 -17.2 4.0 12.0 10.0 11.9


06 January 2011


Figure 78: Balance sheet (HTHT.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Property, plant and equipment 465 957 1,028 1,286 1,629 1,952

Goodwill 16 20 18 18 18 18

Intangible assets, net 21 22 20 18 17 15

Other non-current assets 52 104 97 97 97 97

Non-current assets 554 1,103 1,165 1,420 1,761 2,083

Cash and cash equivalents 174 183 271 855 1,180 1,278

Accounts receivable 4 13 15 19 28 55

Prepaid rent 40 76 70 70 50 60

Inventories 10 23 9 11 16 21

Other current assets 54 35 52 58 35 126

Current assets 282 330 417 1,012 1,309 1,519

Total assets 836 1,433 1,581 2,432 3,070 3,602

Accounts payable 84 183 142 128 266 286

Salaries and welfare payable 13 34 30 33 57 69

Deferred revenue 4 16 43 45 62 85

Accruals exp. and other current liabilities 134 236 151 199 215 233

Current liabilities 234 468 366 405 600 672

Deferred rental 46 138 175 174 356 394

Other long-term liabilities 13 59 139 36 48 64

Non-current liabilities 59 197 313 210 404 458

Total liabilities 293 665 679 615 1,004 1,131

Minority interest 2 6 11 16 20 26

Mezzanine equity 438 797 797 0 0 0

Additional paid-in capital 260 265 352 1,849 1,849 1,849

Accumulated deficit -152 -288 -245 -34 210 610

Accumulated other comprehensive loss -6 -12 -13 -13 -13 -13

Shareholder equity 103 -35 94 1,802 2,046 2,446

Total equity and liabilities 836 1,433 1,581 2,432 3,070 3,602


Figure 79: Cash flow statement (HTHT.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Profit after tax -114 -133 51 204 235 388

Share-based compensation 15 5 8 13 16 19

Depreciation and amortisation 33 91 146 194 271 365

Change in assets and liabilities -9 -27 44 -18 315 -24

Other cash & non-cash items 6 50 48 -1 181 38

Cash generated from operations -68 -14 296 392 1,018 786

Purchase of property and equipment -258 -470 -264 -450 -611 -686

Other investing cash inflows -26 18 8 1 0 0

Net cash used in investing activities -284 -452 -256 -449 -611 -686

Net proceeds from issuance of ordinary shares 0 0 31 700 0 0

Net proceeds from issuance of Series B preferred shares 310 271 0 0 0 0

Proceeds from short-term debt 158 262 150 0 0 0

Repayment of short-term debt -158 -220 -230 0 0 0

Proceeds from long-term debt 0 30 142 0 0 0

Repayment of long-term debt 0 -1 -35 -57 -80 0

Deposits of deposits of share subscription 0 105 0 0 0 0

Other financing activities 188 34 -11 -2 -2 -2

Net cash from/(used in) financing activities 499 482 47 641 -82 -2


06 January 2011


Figure 80: Han Ting Express Hotel – standard room Figure 81: Han Ting Express Hotel – shower room

Source: Han Ting Source: Han Ting

Figure 82: Han Ting Seasons Hotel – standard room Figure 83: Han Ting Seasons Hotel – lobby


Figure 84: Han Ting Hi-inn – standard room Figure 85: Han Ting Hi-inn – outlook


06 January 2011


Investment risks ■ Post-EXPO slowdown: During the six-month EXPO event, the room rates of the

hotels in Shanghai rocketed 40-100% in general. Except for the 20-25% income tax, the rest of the incremental room rate hike contributed to earnings, resulting in a high base for 2011. The market might overreact to ugly QoQ travel data, especially with the comparison with 7 Days which had less EXPO exposure in Shanghai. We believe possible share price weakness would create a buying opportunity.

■ Possible declining room rate and margin: With more new hotels in second- and third-tier cities, the overall room rate might decline. When expanding to more new cities, margins might drop for a while, before operating leverage kicks in following more hotels operating in one city. Han Ting’s city coverage is narrower than that for and 7 Days.

■ Operating leverage and inflation remain system risks. A significant portion of hotel operating coasts (including rents and labour cost) is nearly fixed, while travel traffic is seasonal. In addition, possible inflation (especially for rentals and labour) would squeeze economy hotels’ margins.

■ Execution and talent. Rapid expansion requires higher execution skills in management, operation and technology, in order to deliver consistent hotel products and services. On top of that, talent recruiting and maintenance could be one of the critical area to remain growth quality.

■ Outbreak of epidemics and natural disasters (such as swine influenza, avian influenza and SARS) could materially and negatively affect a hotel’s operational and financial performance. Any prolonged recurrence of such contagious diseases or other adverse public health developments in China may have a material and negative effect on hotel operations.

■ Global and domestic economic development have a positive co-relationship with economy hotel operational and financial performance, although we believe the sensitivity of the economy hotel segment is lower than that for the upscale hotel segment.

Figure 86: Key milestones of Han Ting Year Event

April 2005 Han Ting was found by Mr Ji Qi

August 2005 Han Ting opened its first hotel in Kunshan, Jiangsu Province

April 2006 Han Ting launched its official website

September 2006 Han Ting launched Han Ting Club, the loyalty membership program

July 2007 Han Ting completed first round of venture funding with US$85 mn

Han Ting launched its online reservation system

August 2007 Han Ting launched its new website (www.htinns.com)

June 2008 Han Ting established a network of 100 hotels

July 2008 Han Ting completed second round of venture funding with US$55 mn

September 2008 Han Ting opened its first Han Ting Inn in Hangzhou, Zhejiang Province

June 2009 Han Ting established a network of 212 hotels, covering 38 cities in China

September 2009 Han Ting rebranded its Han Ting Inn as Han Ting hi Inn and managed a multiple-product economy hotel chain

December 2009 Han Ting established a network of 236 hotels (covering 39 cities in China) and developed a loyalty membership base with more than 1.5 mn individual members and 84,000 corporate members

February 2010 Han Ting rebranded its Han Ting Hotel as Han Ting Seasons Hotel

March 2010 Han Ting completed IPO with its ADRs listed on NASDAQ

September 2010 Han Ting established a network of 368 hotels (covering 55 cities in China) and developed a loyalty membership base with more than 2.3 mn individual members


After-tax EXPO impact: Rmb58 mn on Han Ting; Rmb16 mn on 7 Days

Han Ting’s city coverage is narrower than 7 Days’

Han Ting’s earnings are less vulnerable in an inflationary environment

06 January 2011


Figure 87: Profile of senior management - Han Ting Name Position Age Profile

1 Qi Ji Founder 43 Founder of Han Ting

Executive Chairman Co-founder of Ctrip

of the Board of Directors Since 2007, Executive chairman of Han Ting

• 1999-2001, CEO and president, Ctrip.com International, Ltd

• Both Master’s and Bachelor’s degree from Shanghai Jiao Tong University

2 Tuo (Matthew) Zhang CEO 44 Since 2009, CEO, Han Ting

• 2007-09, COO, Han Ting

• 2005-07, Co-founder and GM, Shanghai IJIAS Technology Co., Ltd

• 2004-05, Vice president, Zhejiang Kasen Industrial Co., Ltd

• 2002-04, OBI Mgnt System (China), OBI Asia Trade and Lux Int’l (Shanghai)

• Prior to 2002, Hawoth, Inc., PepsiCo, Inc. and Xerox Corporation

• Bachelor’s degree from Shanghai Jiao Tong University

3 Min (Jenny) Zhang CFO 36 Since 2007, CFO, Han Ting

• Prior to 2007, Finance director at Eli Lilly Thailand Branch; CFO at ASIMCO Casting (Beijing); Consultant at McKinsey & Company

• MBA from Harvard and Master’s and Bachelor’s degrees from University of International Business and Economics

4 Haijun Wang Executive VP 33 Since 2005, Executive vice president, Han Ting

• 1999-2005, management positions, Jinjiang Inn and other hotels

• MBA from CEIBS and graduated from Yanshan University


Figure 88: Profile of board of directors – Han Ting Name Position Age Profile

1 Qi Ji Founder 43 Founder of Han Ting

Executive Chairman of Co-founder of Ctrip

the Board of Directors Since 2007, Executive chairman of Han Ting

• 1999-2001, CEO and president, Ctrip.com International, Ltd

• Both Master's and Bachelor's degree from Shanghai Jiao Tong University

2 John Jiong Wu Co-founder, Director 42 Co-founder of Han Ting

Since 2007, Director, Han Ting; Venture Partner, Northern Light Venture Capital

• 2000-07, Angel investor and CTO, Alibaba Group

• Before 2000, engineer and manager, Oracle and Yahoo! Inc.

• Bachelor’s degree from university of Michigan

3 Tongtong Zhao Co-founder, Director 43 Co-founder of Han Ting

Since 2007, Director, Han Ting;

• 2004-06, GM, Shanghai Asia-Tang Health Technology Development Co., Ltd.

• 1999-2001, GM, Shanghai Hong Ying Hi-Tech Co., Ltd.

• Master’s degree from McGill University, Bachelor’s from Shanghai Jiaotong University

4 Min Fan Director 44 Co-founder of Ctrip

Since 2000, CEO, COO, director, president and executive vice president, Ctrip

• 1997-2000, CEO, Shanghai Travel Service Company

• 1990-97, Deputy general manager, Shanghai New Asia Hotel Management Co

• Both Master’s and Bachelor’s degrees from Shanghai Jiao Tong University

5 Joseph Chow Independent Director Since 2010, Independent director, Han Ting

• 2008-09, Managing director, Goldman Sachs (Asia) LLP

• 2006-08, independent financial consultant

• 2005-06, CFO, Harbor Networks Limited

• 2001-04, CFO, China Netcom (Holdings) Company limited

• MBA from University of Maryland at College Park, Bachelor’s from Nanjing Institute of International Relations


06 January 2011


Asia Pacific / China Lodging

7 Days Group Holdings Ltd. (SVN.N / SVN US)

Simple, easy and fast ■ China’s third-largest economy hotel operator with a 9.3% market share:

7 Days operated 461 hotels and covered 75 cities in China, as of 3Q10. Franchised hotels account for 39% of total hotels and management plans to raise this to over 50%. 7 Days targets a younger generation offering competitive room rates at the expense of location attractiveness. It plans to expand to more second and third-tier cities, relying on the franchise model.

■ Keeping everything simple, easy and standard: 7 Days maintains one brand, one hotel format and one discounting policy. We believe that this simple business model enables the company to replicate hotels more rapidly across the whole country. Based on its strong online booking system and club membership, 7 Days is able to access its targeted consumers more accurately in a cost efficient way, which fits with its low-price strategy. As of 3Q10, the company had 14 mn club members. Some 70% of room nights booked through the company’s own booking website and 94% of room nights are sold to club members, resulting in a lower-than-peer sales and marketing ratio.

■ Investment risks and catalysts: 7 Days is more likely to deliver higher-than-expected expansion, based on its simple business model. It has established broad city coverage, suggesting margin expansion potential. However, 7 Days has lower core EBITDA margins and ROE, partly due to its low-priced strategy. This makes 7 Days more vulnerable to inflationary pressure, especially rental and labour costs. Although its business model requires higher execution skills, 7 Days is more defensive in an economic down-cycle, based on its lower breakeven occupancy level.

■ Initiating coverage with an OUTPERFORM: Assuming a WACC of 11.3% and terminal growth of 2.5%, our DCF-based target price of US$28.8 suggests 40% upside and implies 16.3x 2011 EV/EBITDA and 14.8x EV/core EBITDA (ex. pre-opening expense). 7 Days trades at 11.7x 2011E EV/EBITDA, compared with Han Ting’s 13.1x, Shangri-La’s 16.1x, Hong Kong Shanghai Hotels’ 17.7x and Kosmopolito’s 20.0x.

Share price performance

010203040

Nov-09 Mar-10 Jul-10 Nov-10

050100150200

Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the MSCI China Free index which closed at 68.29 on 05/01/11 On 05/01/11 the spot exchange rate was US$1./US$1

Performance Over 1M 3M 12M Absolute (%) -15.6 10.6 50.2 Relative (%) -16.0 8.5 46.5

Financial and valuation metrics

Year 12/09A 12/10E 12/11E 12/12E Revenue (Rmb mn) 1,141.3 1,498.3 2,018.8 2,596.1 EBITDA (Rmb mn) 228.0 382.0 537.9 730.3 EBIT (Rmb mn) 83.5 193.1 294.0 429.4 Net income (Rmb mn) 10.3 157.7 230.4 334.3 EPS (CS adj.) (Rmb) 0.44 3.15 4.60 6.67 Change from previous EPS (%) n.a. Consensus EPS (Rmb) n.a. 2.80 4.29 6.07 EPS growth (%) n.a. 616.2 46.1 45.1 P/E (x) 309.5 43.2 29.6 20.4 Dividend yield (%) — — — — EV/EBITDA (x) 29.2 16.5 11.7 8.4 P/B (x) — — — — ROE 1.8 11.9 15.2 18.6 Net debt/equity (%) Net cash Net cash Net cash Net cash

Source: Company data, Thomson Reuters, Credit Suisse estimates.

*Stock ratings are relative to the relevant country benchmark. ¹Target price is for 12 months. [V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts

Kevin Yin 852 2101 7655

[email protected]

Rating OUTPERFORM* [V] Price (05 Jan 11, US$) 20.58 Target price (US$) 28.80¹ Chg to TP (%) 39.9 Market cap. (US$ mn) 1,023 (US$ 1,023) Enterprise value (Rmb mn) 6,311 Number of shares (mn) 49.69 Free float (%) — 52-week price range 24.97 - 9.31

06 January 2011


Figure 89: Income statement (SVN.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Gross revenue 268 765 1,210 1,585 2,136 2,747

Gross revenue growth (%) 360.9 186.0 58.2 31.0 34.7 28.6

- Leased-and operated hotels 361 185 57 25 32 28

- Franchised-and-managed hotels 494 983 82 31

Gross revenue mix (%) 100 100 100 100 100 100

- Leased-and operated hotels 100 100 99 94 93 92

- Franchised-and-managed hotels 0 0 1 6 7 8

Net revenues 253 721 1,141 1,498 2,019 2,596

Net revenue growth (%) 185.4 58.2 31.3 34.7 28.6

Operating costs & expenses

1) Hotel operating cost (273) (730) (972) (1,175) (1,572) (1,972)

As % of LO gross revenue 95.6 80.8 78.4 79.5 77.7

- Rents 38.7 29.3 29.3 29.7 29.1

- Utilities 7.5 7.5 7.5 7.6 7.4

- Personnel costs 21.6 17.0 16.1 17.1 16.8

- Dep. and amort. 11.6 12.0 12.6 12.3 11.9

- Consumables, F&B 6.5 4.9 4.4 4.5 4.4

- Others 9.7 10.1 8.5 8.4 8.2

Hotel operating cost mix 100 100 100 100 100 100

- Rents 48 40 36 37 37 37

- Utilities 7 8 9 10 10 10

- Personnel costs 18 23 21 21 22 22

- Dep. and amort. 10 12 15 16 16 15

- Consumables, F&B 8 7 6 6 6 6

- Others 9 10 12 11 11 11

2) Sales & marketing exp. (14) (37) (31) (36) (42) (52)

3) G&A expenses (56) (94) (65) (111) (145) (184)

4) Pre-opening expense (incl. in hotel op. cost) (55) (40) (30) (45) (54) (63)

Total operating costs and exp (343) (861) (1,067) (1,322) (1,760) (2,209)

Op. exp. as % of net revenue

1) Hotel operating cost (%) 108.1 101.2 85.1 78.4 77.9 76.0

2) Sales & marketing exp (%) 5.4 5.1 2.7 2.4 2.1 2.0

3) G&A expenses (%) 22.2 13.0 5.7 7.4 7.2 7.1

4) Pre-opening expense (%) 21.7 5.5 2.6 3.0 2.7 2.4

Total op. exp. as % of net revenue 135.7 119.3 93.5 88.2 87.2 85.1

Income from operations (90) (139) 74 177 259 387

Adj. EBITDA (reported) (47) (24) 228 379 534 725

Adj. EBITDA (CS) (47) (24) 228 382 538 730

- EBITDA YoY (%) 250.7 -49.6 -1,068 67.6 40.8 35.8

- EBITDA margin -18.5 -3.3 20.0 25.5 26.6 28.1

Profit before tax (120) (211) (107) 183 266 396

- Effective tax rate -2.7 0.4 4.6 21.0 25.0 25.0

Net earnings (GAAP) (123) (211) (104) 141 195 292

- Net earnings increase YoY (%) 471.2 71.5 -50.6 -236 38.4 49.6

- Net margin -48.5 -29.2 -9.1 9.4 9.7 11.3

Adj. net earnings (reported) -120 -221 -1 141 195 292

- Net earnings increase YoY (%) 460.8 83.4 -100 n.a. 38.4 49.6

- Net margin -47.7 -30.6 -0.1 9.4 9.7 11.3

Adj. net earnings (CS) -105 -194 10 158 230 334

- Net earnings increase YoY (%) 431.3 84.8 -105.3 1,429.8 46.1 45.1

- Net margin (%) -41.5 -26.9 0.9 10.5 11.4 12.9

Source: Company data, Credit Suisse estimate

06 January 2011


Figure 90: Balance sheet (SVN.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Property, plant and equipment 590 963 1,014 1,189 1,470 1,778

Rental deposits 29 39 38 38 38 38

Other non-current assets 28 20 17 17 17 17

Non-current assets 647 1,022 1,069 1,244 1,526 1,833

Cash and cash equivalents 179 284 341 595 686 889

Accounts receivable 2 3 5 12 16 27

Prepaid rent 58 62 65 70 70 70

Other prepaid expenses and current assets 29 47 48 15 20 25

Other current assets 160 57 307 13 13 13

Current assets 427 453 765 704 804 1,024

Total assets 1,075 1,475 1,834 1,948 2,329 2,858

Accounts payable 190 273 141 181 207 258

Income tax payable 2 2 6 8 13 20

Accruals for expenses and other current liabilities 93 122 179 195 262 337

Current liabilities 285 397 326 383 483 615

Senior notes payable 517 504 0 0 0 0

Accrued lease payments 63 99 117 150 198 254

Other non-current liabilities 89 73 143 5 5 5

Non-current liabilities 669 677 259 155 203 259

Total liabilities 954 1,074 586 538 685 874

Minority interest 0 1 3 6 10 15

Series A convertible preferred shares 78 78 0 0 0 0

Series C convertible preferred shares 0 436 0 0 0 0

Ordinary shares 62 62 140 140 140 140

Series B convertible preferred shares 8 8 0 0 0 0

Additional paid-in capital 142 169 1,559 1,559 1,559 1,559

Accumulated other comprehensive income 3 30 31 31 31 31

Accumulated deficit -170 -381 -485 -327 -96 238

Shareholder equity 42 -114 1,246 1,404 1,634 1,969

Total equity and liabilities 1,075 1,475 1,834 1,948 2,329 2,858


Figure 91: Cash flow statement (SVN.US) Year-end 31 Dec (Rmb mn) 2007 2008 2009 2010E 2011E 2012E

Profit after tax (124) (210) (102) 144 199 297

Depreciation and amortisation 27 90 146 189 244 301

Share-based compensation 16 27 11 17 35 42

Change in assets and liabilities 25 81 72 86 138 172

Other cash & non-cash items 12 16 122 (2) 0 0

Net cash generated from operating activities (44) 4 249 434 617 812

Purchase of property and equipment (338) (405) (326) (364) (526) (608)

Purchase of short-term investment 0 0 (294) 294 0 0

Net cash used in investing activities (338) (405) (620) (70) (526) (608)

Proceeds, from issuance of ordinary shares upon IPO 0 0 811 0 0 0

Proceeds, from issuance of Series B convertible preferred shares 86 0 0 0 0 0

Proceeds from issuance of Series C convertible preferred shares 0 444 0 0 0 0

Other financing activities 471 66 (382) (110) 0 0

Net cash from/(used in) financing activities 557 510 429 (110) 0 0


06 January 2011


Figure 92: 7 Days Express – lobby Figure 93: 7 Days Express: a standard room

Source: 7 Days Source: 7 Days

Figure 94: 7 Days Express: free internet in lobby Figure 95: 7 Days Express: outlook


Figure 96: 7 Days Express: room amenities Figure 97: 7 Days Express: dining area


06 January 2011


Investment risks ■ Execution and talents. Rapid expansion requires higher execution skills in

management, operations and technology, in order to deliver consistent hotel products and services. On top of that, talent recruiting and maintenance could be one of the critical areas to ensure growth quality. Compared with peers, 7 Days has a more aggressive new hotel opening expansion plan and relies more on franchise strategy.

■ Operation leverage and inflation are the system risks. A significant portion of hotel operating costs (including rental and labour costs) is nearly fixed, while travel traffic is seasonal. In addition, possible inflation (especially in rental and labour costs) would squeeze economy hotels’ margins. 7 Days is more vulnerable in an inflationary environment.

■ Possible declining room rate and margin. With more new hotels in second and third-tier cities, the overall room rate might decline. When expanding to more new cities, margins might drop for a while, before operating leverage kicks in following more hotels operating in one city. 7 Days’ city coverage is broader than Han Ting’s.

■ Global and domestic economic development has a positive co-relationship with economy hotels’ operational and financial performances, though we believe the sensitivity for the economy hotel segment is lower than for the upscale hotel segment.

■ Outbreak of epidemics and natural disasters (such as swine influenza, avian influenza and SARS) could materially and negatively affect a hotel’s operational and financial performance. Any prolonged recurrence of such contagious diseases or other adverse public health developments in China may have a material and negative effect on hotel operations.

Figure 98: Key company milestones – 7 Days Year Event

March 2005 7 Days opened its first hotel in Guangzhou, Guangdong Province

April 2005 7 Days launched its official website (www.7daysinn.cn), central reservation system and loyalty membership system

November 2006 7 Days completed its first round of venture funding with US$10 mn

May 2007 7 Days established a network of 100 hotels and launched it 27/7 SMS reservation service

September 2007 7 Days completed its second round of venture funding with US$95 mn

October 2007 7 Days launched its 24/7 WAP reservation service (wap.7daysinn.cn)

April 2008 Alexa ranked 7 Days' website as No.1 domestic economy hotel website and No.2 international economy hotel website

June 2008 7 Days established a network of 260 hotels

October 2008 7 Days completed its third round of venture funding with US$65 mn

January 2009 Alexa ranked 7 Days' website as No.1 international economy hotel website

7 Days established a network of 300 hotels

November 2009 7 Days completed IPO with ADRs listed on NYSE

December 2009 7 Days established a network of 400 hotels

March 2010 7 Days developed a loyalty membership base of more than 11 mn

June 2010 7 Days established a network of 600 hotels and developed a loyalty membership base of more than 13 mn

September 2010 7 Days established a network of 700 hotels and developed a loyalty membership base of more than 14 mn


7 Days has a more aggressive expansion plan relies more on the franchise model

7 Days’ earnings are more sensitive to inflation

7 Days’ city coverage is broader than Han Ting.

7 Days is more defensive in an economic downcycle, based on its lower occupancy breakeven level

06 January 2011


Figure 99: Profile of senior management – 7 Days Name Position Age Profile

Nanyan Zheng Founder, CEO 41 Founder of 7 Days Director Since 2004, CEO and director, 7 Days • 2000-04, VP & GM of southern China and VP in charge of national marketing, Ctrip.com • 2001, Computer centre of the Economic and Trade Commission of Guangdong Province • 1992, founded Lao Ye Computer Company and developed its Pegasus Management System • Bachelor’s degree from Sun Yat-Sen University in China

Harry Ren Zhang COO 41 Since 2009, COO, 7 Days • 1995-2009, Senior director of operations, Wal-Mart China • Prior to 1995, Manager, ParknShop supermarket chain • MBA from the University of Utah and degree from Shanghai International Studies University

Eric Haibing Wu CFO 37 Since 2007, CFO, 7 Days • 2000-07, Senior manager, PricewaterhouseCoopers in US and China • 1990-97, Deputy general manager, Shanghai New Asia Hotel Management Company • AICPA, MBA from Michigan State University and Bachelor from Shanghai Jiao Tong

University Yuezhou Lin SVP, CIO 39 Since 2004, Senior vice president and CIO, 7 Days • 1993-2004, Deputy general manager, Guangzhou Wanxun Computer Software Co., Ltd • Bachelor degree from Sun Yat-Sen University in China

Ji Huang SVP 36 Since 2006, Senior vice president, 7 Days • Prior to 2006, Chief representative of Asia and Pacific regions, Fetim b.v. • Master from Beihang University and Bachelor from West China University of Medical Science

Huaisheng Zhou VP 45 Since 2007, Vice president, 7 Days • 2006, Deputy general manager, TCL Computer Technology Co., Ltd • 2003-06, TCL Group Company Ltd


Figure 100: Profile of board of directors – 7 Days Name Position Age Profile

Boquan He Founder 49 Founder of 7 Days Chairman of the Since 2004, Chairman of the board of directors of 7 Days Board of • 1989-2002, Founder and CEO, Robust Group Directors • Founder and chairman of the board of directors of Guangdong Nowaday Investment Co., Ltd • Chairman of the board of GZ Nowaday Office Box Co & SH 9diamond Co

Nanyan Zheng Founder, CEO 41 Since 2004, CEO and director, 7 Days Director • 2000-04, VP & GM of southern China and VP in charge of national marketing, Ctrip.com • Bachelor's degree from Sun Yat-Sen University in China

Minjian Shi Director 47 Since 2006, Director, 7 Days • 2005-06, Managing director, Guangdong Nowaday Investment Co., Ltd • 2000-05, Vice president of finance, Robust Group • Master’s from Macquarie University, Bachelor’s from Shanghai Jiao Tong University

Miao Chi Director 38 Since 2006, Director, 7 Days • 2005-06, Principal, Warburg Pincus • 2003-05, Investment services manager, CB Richard Ellis • MBA from University of Chicago and Bachelor’s degree from Dalian Railway Institute in China

Meng Ann Lim Director 46 Since 2009, Director, 7 Days • Since 2007, Partner and regional head for China and South East Asia, Actis • 1997-2007, Executive VP and head of private equity investment activities in China, GIC • CFA, MBA from Strathclyde University and Bachelor’s degree from University of London

Wee Seng Tan Independent 54 Since 2009, Independent Director, 7 Days Director • 2003-08, Executive director, CFO and company secretary, Li Ning • 1999-02, SVP of the China, Mongolia and North Korea regions for Reuters

Bin Dai Independent 42 Since 2009, Independent Director, 7 Days Director • Currently serves as VP of China Tourism Academy, president of Beijing Hospitality Institute and

independent director of Huangshan Tourism Development Co. and China CYTS Tours Holdings Co.


06 January 2011


Appendix 1: Overview of China lodging industry Figure 101: China lodging industry breakdown by hotel counts 2000 2008 CAGR 2000-08 (%)

Hotel count (units) 237,800 315,893 4

(1) Star hotels 6,029 14,099 11

- 1~3-star hotels 5,560 11,846 10

- 4&5-star hotels 469 2,253 22

(2) Non-star hotels 231,771 301,794 3

- Branded economy hotels 23 2,805 82



Hotel count mix (%) 100.0 100.0 0.0

(1) Star hotels 2.5 4.5 1.9

- 1~3-star hotels 2.3 3.8 1.4

- 4 & 5-star hotels 0.2 0.7 0.5

(2) Non-star hotels 97.5 95.5 -1.9




Figure 102: China lodging industry breakdown by hotel room counts 2000 2008 CAGR 2000-08 (%)

Hotel room count ('000 units) 20,100 27,347 4

(1) Star hotels 595 1,591 13

- 1~3-star hotels 465 1,065 11

- 4&5-star hotels 130 526 19

(2) Non-star hotels 19,505 25,755 4

- Branded economy hotels 3 313 77



Hotel room count ('000 units) 100.0 100.0 0.0

(1) Star hotels 3.0 5.8 2.9

- 1~3-star hotels 2.3 3.9 1.6

- 4&5-star hotels 0.6 1.9 1.3

(2) Non-star hotels 97.0 94.2 -2.9




Figure 103: Room per hotel summary Hotel room/hotel (units) 2000 2008 Change

Overall 85 87 2

(1) Star hotels 99 113 14

- 1~3-star hotels 84 90 6

- 4 & 5-star hotels 277 234 (44)

(2) Non-star hotels 84 85 1

- Branded economy hotels 141 112 (29)

- Non-chain, guest houses 84 85 1


06 January 2011


Appendix 2: Overview of China branded economy hotel sector Figure 104: China branded economy hotel sector growth summary

Number of YoY growth (%)

Hotel Room Room/hotel Hotel Room Room/hotel

2000 23 3,236 141 41.3

2001 36 4,741 132 56.5 46.5 -6.4

2002 50 6,048 121 38.9 27.6 -8.2

2003 87 10,292 118 74.0 70.2 -2.2

2004 166 19,199 116 90.8 86.5 -2.2

2005 522 56,854 109 214.5 196.1 -5.8

2006 906 98,817 109 73.6 73.8 0.1

2007 1,698 188,788 111 87.4 91.0 1.9

2008 2,805 312,930 112 65.2 65.8 0.3

2009 3,757 412,840 110 33.9 31.9 -1.5

1H10 4,270 461,115 108

CAGR 2000-05 (%) 86.7 77.4 -5.0

CAGR 2005-09 (%) 63.8 64.2 0.2

CAGR 2003-08 (%) 100.3 98.0 -1.2

CAGR 2000-09 (%) 76.2 71.4 -2.7

Source: Inntie

Figure 105: China economy hotel geographical distribution (2008)

East China (Shanghai,

Hangzhou, Nanjing)

44%

South China

(Guangzhou,

Shenzhen, Xiamen)

13%

Middle China (Wuhan,

Changsha)

12%

South West China

(Chengdu, Chongqing)

5%

North China (Beijing,

Tianjin)

18%

North East China

(Sheny ang, Harbin)

5%

North West China (

Xi'an, Lanzhou)

3%

Source: China Hotel Association 2008

Figure 106: China branded economy hotels: major operation indicators 2007 2006 2005

Average listing price (Rmb) 212 209 328

Average room rate (Rmb) 190 169 154

Average discount (%) -10 -19 -53

Average occupancy rate (%) 82 82 89

Average RevPAR (Rmb) 156 141 138


06 January 2011


Figure 107: China branded economy hotels: average room rates (Rmb) 2007 2006 Change YoY (%)

Beijing 185 210 -11.9

North China (Tianjin) 183 186 -1.6

Shanghai 178 201 -11.4

East China (Hangzhou, Nanjing) 172 173 -0.6

North West China ( Xi'an, Lanzhou) 158 145 9.0

South China (Guangzhou, Shenzhen, Xiamen) 155 169 -8.3

North East China (Shenyang, Harbin) 152 158 -3.8

Middle China (Wuhan, Changsha) 151 151 0.0

South West China (Chengdu, Chongqing) 128 160 -20.0


Figure 108: China branded economy hotel sector: room rate distribution (2009)

Rmb150 - 200

51%

Rmb100 - 150

15%

Below Rmb100

5%Abov e Rmb300

3%

Rmb200 - 300

26%

Source: Inntie

Figure 109: China branded economy hotels: revenue breakdown by consumption items (%) 2007 2006

Room accommodation 88 87

Food and beverage 9 11

Others 3 2

Total 100 100


Figure 110: China branded economy hotels: occupancy rates (%) 2007 2006 Change (p.p.)

East China (Hangzhou, Nanjing) 90 84 6

Shanghai 89 85 4

Beijing 88 84 4

North China (Tianjin) 87 86 1

Middle China (Wuhan, Changsha) 82 83 -1

North East China (Shenyang, Harbin) 80 82 -2

North West China ( Xi'an, Lanzhou) 76 80 -4

South West China (Chengdu, Chongqing) 74 77 -3

South China (Guangzhou, Shenzhen, Xiamen) 74 72 2


06 January 2011


Figure 111: Labour costs as a % of revenue Figure 112: Utility costs as a % of revenue

10%-13%, 35%

13%15%, 27%

15%-18%, 22%

18% and

abov e, 16%

8% and below ,

69%

8%-10%, 21%

10%-13%, 8%

13%-15%, 2%

Source: China Hotel Association 2008 Source: China Hotel Association 2008

Figure 113: Staff-to-room ratio Figure 114: Hotel staff background

0.3 and below ,

11%

0.3-0.35, 63%

0.35-0.4, 24%

0.4 and abov e,

2%

Fresh

graduates

31%

Joined from

other hotels

28%

Early -retired

from SOE

16%

Immigrate

w orkers

11%

Others

14%

2007


Figure 115: Compensation of hotel managers Figure 116: Compensation of hotel staff

62,500

86,600

140,300

74,444

107,470

144,222

19%

24%

3%

50,000

100,000

150,000

Minimum Av erage Max imum

0%

5%

10%

15%

20%

25%

30%

2006 2007 Change YoY

(Rmb) (%)

10,600

14,59116,453

26,809 26,800

10,920

13%

3%

0%

0

10,000

20,000

30,000

Minimum Av erage Max imum

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 Change YoY

(Rmb) (%)


06 Jan

uary 2011

Ch

ina E

con

om

y Ho

tel Secto

r 50

Appendix 3: Snapshot of Top-ten Figure 117: A snapshot of the top-ten branded economy hotels in China Hotel Hotel

Ranking Brand counts room counts Room

1H10 (Mkt shr) (Mkt shr) per Rate

(2009) (units) (%) (units) (%) hotel (Rmb) Set up Listing Web Note

1 (1) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.

2 (2) 锦江之星 (Jinjiang Inn)

358 7.8 48,035 9.5 134 181 1996.5 2006.12 (China) www.jinjianginns.com Jinjiang Inn (600754.CH) is the budget hotel brand under Jinjiang International Group (2006.HK)

3 (4) 7天 (7 Days Inn)

399 8.7 39,561 7.8 99 165 2005.3 2009.11 (US) www.7daysinn.cn Owns the largest registered membership (14 mn as of 3Q10) and has a superior IT platform.

4 (3) 莫泰 168 (Motel 168)

220 4.8 37,004 7.3 168 190 2002 Private www.motel168.com Two sub-brands: Motel 168 (main brand) and Motel 268 (premium brand). MS Private Equity owns part of Motel 168's

5 (5) 汉庭 (Han Ting)

294 6.4 33,718 6.7 115 200 2005.4 2010.3 (US) www.htinns.com Owns three sub-brands: HanTing Seasons (premium brand), Express (main brand) and Hi-inn (low-end). Founded by Ji Qi (Co-founder/former CEO of Ctrip).

6 (6) 格林豪泰 (Green Tree Inn)

232 5.0 23,623 4.7 102 200 2004.11 Private www.998.com Under GreenTree Inns Hotel Management Group, which was founded by several American investment enterprises and is the only wholly owned foreign hotel enterprise in China.

7 (7) 速 8 (Super 8)

167 3.6 15,595 3.1 93 207 1974 (US); 2004.4 (China)

2006.7 (US) www.super8.com.cn Under Wyndham Worldwide which is one of the world's largest hospitality companies across six continents. Entered China in 2004.

8 (8) 宜必思 (ibis Hotel)

42 0.9 7,661 1.5 182 202 2004.4 (China) 2003.6 (France) www.ibis.cn Under Accor, one of the world’s leading hotel managers operating hotels ranging from budget to upscale worldwide. Entered China in 2004.

9 (9) 中州快捷 (Hotel Home)

25 0.5 3,148 0.6 126 143 2002.3 Private www.zzkjinns.com Focused on Henan Province; Under Zhongzhou International Group, the largest hotel group in middle and West China.

10 (12) 城市客栈 (City Inn) 19 0.4 2,695 0.5 142 237 2005 Private www.cityinn.com.cn Focus on Guangdong; Under OCT International (华侨城), a leading professional hotel management company (midscale + budget hotels).

Top-3 31 33 116 174

Top-10 53 57 128 190

7 Days, Han Ting 15 15 107 183


06 January 2011


Figure 118: Top-20 express hotels (as of 1H10-end) Brand # of rooms # of hotels # of rooms/hotel Room rate (Rmb)

1 n.a. n.a. n.a. n.a. n.a.

2 锦江之星 (Jinjiang Inn) 48,035 358 134 181

3 7天 (7 Days Inn) 39,561 399 99 165

4 莫泰 168 (Motel 168) 37,004 220 168 190

5 汉庭 (Han Ting) 33,718 294 115 200

6 格林豪泰 (GreenTree) 23,623 232 102 200

7 速 8 (Super 8) 15,595 167 93 207

8 宜必思 (ibis Hotel) 7,661 42 182 202

9 中州快捷 (Hotel Home) 3,148 25 126 143

10 城市客栈 (City Inn) 2,695 19 142 237

11 禧龙宾馆 (Xi Long) 2,498 32 78 181

12 金狮 100 (Gold-lions) 2,342 16 146 129

13 华天之星 (Huatian Inn) 2,320 17 136 160

14 格林联盟 (GTA Hotel) 2,128 26 82 203

15 佳园连锁 (Garden Inn) 1,950 20 98 212

16 银座佳驿 (Grace Inn) 1,899 21 90 161

17 欣燕都 (Shindom Inn) 1,885 24 79 196

18 安逸 158连锁 (Ane Hotel) 1,843 16 115 182

19 精通酒店 (Jin-tone Hotel) 1,684 12 140 136

20 华坤连锁 (Huakun Hotel) 1,622 22 74 141

Source: Inntie

Figure 119: Top-10 mid-scale business hotel (as of 1H10-end) Brand # of rooms # of hotels # of rooms/hotel Room rate (Rmb)

1 星程酒店 (Starway Hotel) 7,430 77 96 258

2 快捷假日 (Holiday Inn Express) 6,225 24 259 356

3 维也纳酒店 (Vienna Hotel) 5,788 26 223 241

4 南苑 e家 (Nanyuan Inn) 3,280 31 106 240

5 汉庭全季 (Han Ting Seasons) 2,966 23 129 422

6 莫泰 268 (Motel 268) 2,916 16 182 244

7 山水时尚酒店 2,075 15 138 277

8 桔子酒店 (Orange Hotel) 1,708 16 107 258

9 富驿时尚酒店 (FuramaXpress Hotel) 1,158 8 145 327

10 万好万家商务 1,131 7 162 239

Source: Inntie

Figure 120: Top-10 hostels (as of 1H10-end) Brand # of rooms # of hotels # of rooms/hotel Room rate (Rmb)

1 99旅馆连锁 4,391 51 86 99

2 布丁酒店连锁 2,603 32 81 168

3 汉庭海友客栈 (Han Ting) 1,098 7 157 209

4 百时快捷 988 11 90 113

5 我的客栈 599 2 n.a 119

6 Yotel QQ 约泰 547 9 61 113

7 id99 520 6 87 129

8 禧龙时钟旅馆 269 9 30 102

9 国际青年旅舍 n.a 157 n.a n.a.

10 万里路连锁 n.a 99 n.a n.a.

Source: Inntie

06 January 2011


Appendix 4: Overview of US lodging industry Figure 121: Key statistics for US lodging industry # of # of Rooms/ Occupancy Avg. Pre-tax Revenue Pre-tax Pre-tax

Year properties rooms property rate room rate RevPAR Revenue profit per room profit/room net margin

(unit) (mn) (unit) (%) (US$) (US$) (US$ bn) (US$ bn) (US$) (US$) (%)

2008 49,505 4.6 93 60 107 64 141 26 30,565 5,609 18.3

2007 48,062 4.5 94 63 104 66 139 28 30,978 6,222 20.1

2006 47,135 4.4 93 63 98 62 133 27 30,318 6,045 19.9

2005 47,590 4.4 92 63 91 57 123 23 27,886 5,136 18.4

2004 47,598 4.4 92 61 86 53 114 17 25,841 3,795 14.7

2003 47,584 4.4 92 61 83 50 105 23,932

2002 47,040 4.4 94 59 84 49 103 14 23,318 3,227 13.8

2001 41,393 4.2 101 60 88 51 104 16 24,667 3,833 15.5

2000 53,500 4.1 77 64 86 54 109 24 26,463 5,854 22.1

1999 52,000 3.9 75 63 81 51 100 22 25,564 5,641 22.1

1998 51,000 3.9 76 64 79 50 93 21 23,872 5,359 22.4

1997 49,000 3.8 78 65 75 48 86 17 22,526 4,474 19.9

1996 47,000 3.6 77 65 71 46 75 13 20,944 3,472 16.6

1995 46,000 3.5 76 66 67 43 72 20,571

1994 45,000 3.4 76 65 63 41 66 19,412

1993 45,000 3.3 73 64 61 62 18,697

1992 44,800 3.2 71 62 59 60 18,594

1991 44,700 3.1 69 61 58 63 20,290

1990 45,020 3.1 69 63 58 61 -6 19,581 -1,839 -9.4

1989 44,300 3 68 64 56 57 19,033

1988 44,300 2.8 63 63 54

1987 44,500 2.7 61 66 56 49 17,963

1986 65 55 44

1985 45,000 2.6 58 66 55 42 16,154

1984 54,000 2.75 51 66 55 33 12,000

1983 53,620 2.7 50 67 52 30 11,000

1982 56,470 2.6 46 65 51 29 11,269

1981 2.1 63

1980 2.1 65 24 11,333

1979 2 68 22 11,150

1978 2 66 19 9,600

1977 51,861 2 39 18 8,850

1972 10

Source: AH&LA Lodging Industry Profiles & Smith Travel Research

06 January 2011


Appendix 5: What do customers care about? Figure 122: Customer industry background Figure 123: Customer occupation background

IT

15%

Lodging &

Dining

13%

Others

18%

Industrial and

mining

enterprises

8%

Financial &

property

9%

Education &

Medical

12%

Wholesale and

retailing

12%

Public utilities

13%

Corporate

management

31%

Sales persons

19%

Gov ernment/

SOE

9%

Retired people

0%Workers

1%

Students

8%

Professional

engineers

22%

Others

10%

Source: Inntie 2008/09 Source: Inntie 2008/09

Figure 124: Where are customers from? Figure 125: Where are they going?

Beijing,

Shanghai &

Guangzhou

36%

County -lev el

cities

31%

Prov incial

capital cities

33%

East

(Shanghai,

Hangzhou,

Nanjing)

32%

North West (

Xi'an, Lanzhou)

3%

North East

(Sheny ang,

Harbin)

6%

Middle China

(Wuhan,

Changsha)

6%

South West

(Chengdu,

Chongqing)

7%

South

(Guangzhou,

Shenzhen,

Xiamen)

18%

North (Beijing,

Tianjin)

28%


Figure 126: How much do customers earn every month? Figure 127: How much do they budget for a nightly stay?

Rmb4,001 and

abov e

34%

Rmb1,001-

4,000

52%

Rmb1,000 and

below

14%

Below Rmb100

15%

Rmb101-150

34%Rmb151-200

26%

Rmb201-299

15%

Abov e

Rmb300

10%


06 January 2011


Figure 128: What ‘services’ customers care about most Figure 129: What ‘facilities’ customers care about most

75%

49% 46%

29%

17% 14%10% 9% 7%

0%

20%

40%

60%

80%Lo

catio

n

Brea

kfas

t

Hot

el n

etw

ork

Trav

el in

form

atio

n

Busi

ness

cen

ter

Roo

m s

ervi

ce

Shop

s

Lunc

h/di

nner

Oth

ers

95%

87%77%

67%

47%42%

25% 22% 22%

9%

0%

20%

40%

60%

80%

100%

Bed

Bath

room

Soun

dpro

of

Broa

dban

d

TV

Roo

m c

olor

Writ

ing

desk

Wat

er d

ispe

nser

War

drob

e

Oth

ers


Figure 130: What ‘promotions’ customers favour most Figure 131: How do customers book the hotels?

66% 64%

55% 55%

43%

9%

0%

20%

40%

60%

80%

Dis

coun

t

coup

on

Mem

bers

hip

card Free

brea

kfas

t

Cas

h

vouc

hers

Red

eem

able

poin

ts Oth

ers

81%

38%30%

14%

5%

0%

20%

40%

60%

80%

100%

Internet Walk-in Phone Tex t

message

Others


Figure 132: How do customers know about the hotels? Figure 133: What do consumers like?

85%

41%

24%

13%7% 5%

0%

20%

40%

60%

80%

100%

Inte

rnet

Wor

d of

mou

th

TV a

nd

new

spap

er

Emai

l

Tele

phon

e

prom

otio

n

Oth

ers

(%)

76%

62%

50%

35% 33%29% 27%

23%

0%

20%

40%

60%

80%

Trav

ellin

g

Shop

ping

Mus

ic

Inte

rnet

sur

fing

Gym

& b

eaut

y

Spor

ts &

car

s

Mon

ey m

gnt

Gam

ing

(%)


06 January 2011


Appendix 6: Customer perceptions? Figure 134: 7 Days stands out in terms of online reservations, branding, facilitation, price quality and promotion

74%70%

60%

54%

41%

53%

70%

59%

37%

26%

10%

20%

30%

40%

50%

60%

70%

80%

Online reservation Branding Facilitation Price quality Promotion

7 Days Han Ting(%)

Source: Inntie - Budget hotel public praise analysis 2009

Figure 135: Han Ting stands out for hygiene, convenience, comfortable, service attitude, bathrooms, environment,

facilities, internet access, travelling service and quality of breakfast

67%65% 64% 63%

61%58%

55%

43%

30%

26%

63%

46%

53%

62%

53%

45% 46%

27% 26%

19%

10%

20%

30%

40%

50%

60%

70%

Hygien Convenience Comfortable Service a ttitude Bathe Environment Facilities Internet access Travellingservice

Quality ofbreakfast

Han Ting 7 Days

(%)

Source: Inntie - Budget hotel public praise analysis 2009

06 January 2011


Companies Mentioned (Price as of 05 Jan 11) 7 Days Group Holdings Ltd. (SVN.N, $20.58, OUTPERFORM, TP $28.8) Accor (ACCP.PA, Eu33.488, OUTPERFORM, TP Eu33.40, MARKET WEIGHT) China Lodging Group (HTHT.OQ, $22.81, OUTPERFORM, TP $26.9) Ctrip.com International (CTRP.OQ, $44.59, NOT RATED) HongKong & Shanghai Hotels (0045.HK, HK$13.7, NOT RATED) InterContinental Hotels (IHG.L, 1303.00 p, OUTPERFORM, TP 1309.00 p, MARKET WEIGHT) Kosmopolito Hotels International Ltd. (2266.HK, HK$1.76, OUTPERFORM [V], TP HK$2.56) Millennium & Copthorne (MLC.L, 587.00 p, OUTPERFORM, TP 605.00 p, MARKET WEIGHT) Rezidor Hotel Group (REZT.ST, SKr39.9, OUTPERFORM [V], TP SKr50.00, MARKET WEIGHT) Shanghai Jinjiang International Hotels Development (600754.SS, Rmb23.5, NOT RATED) Shangri-la Asia (0069.HK, HK$22.25, OUTPERFORM, TP HK$25.20) Whitbread (WTB.L, 1832.00 p, OUTPERFORM, TP 1935.00 p, MARKET WEIGHT)

Disclosure Appendix Important Global Disclosures I, Kevin Yin, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

See the Companies Mentioned section for full company names. 3-Year Price, Target Price and Rating Change History Chart for SVN.N SVN.N Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption

0

5

10

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25

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10

Closing Price Target Price Initiation/Assumption Rating

US$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for HTHT.OQ HTHT.OQ Closing

Price Target

Price

Initiation/ Date (US$) (US$) Rating Assumption

0

5

10

15

20

25

1/7/08

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10

Closing Price Target Price Initiation/Assumption Rating

US$

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

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06 January 2011


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See the Companies Mentioned section for full company names. Price Target: (12 months) for (SVN.N) Method: We use DCF model as our primary valuation methodology, as we think DCF is able to better capture a company's medium to long term growth momentum. We then use EV/EBITDA multiple to cross-check our DCF-based target prices, as we believe EV/EBITDA multiple is a better matrix to value a hotel company based on the real and normalized earnings powder and quality. Assuming WACC 11.3% and terminal growth 2.5%, our DCF-based target price of US$28.8 implies 16.3x 2011 EV/EBITDA and 14.8x 2011 EV/core EBITDA (excluding pre-opening expense). Risks: Downside risks to our target price of US$28.8 include: 1) execution and talent retaining (especially when 7 Days expands to second and third tier cities rapidly); 2) operation leverage and inflation (the bulk of the hotel operation cost is fixed, while travel traffic is seasonal; inflation is system risk to each economy hotel); 3) possible decline in room rate and margin (due to competition and wide city coverage); 4) global and domestic economic down cycle: and 5) outbreak of epidemics and natural disasters. Price Target: (12 months) for (HTHT.OQ) Method: We use DCF model as our primary valuation methodology, as we think DCF is able to better capture a company's medium to long term growth momentum. We then use EV/EBITDA multiple to cross-check our DCF-based target prices, as we believe EV/EBITDA multiple is a better matrix to value a hotel company based on the real and normalized earnings powder and quality. Assuming WACC 11.3% and terminal growth 2.5%, our DCF-based target price of US$26.9 implies 16.5x 2011 EV/EBITDA and 13.6x 2011 EV/core EBITDA (excluding pre-opening expense). Risks: Downside risks to our target price of US$26.9 include: 1) post-EXPO slowdown (though we have factored in the post-EXPO slowdown in our earnings forecast, market might overreact to QoQ travel data and news flow); 2) possible decline in room rate and margin (due to competition and wide city coverage); 3) operation leverage and inflation (the bulk of the hotel operation cost is fixed, while travel traffic is seasonal; inflation is system risk to each economy hotel); 4) execution and talent retaining (especially when 7 Days expands to second and third tier cities rapidly); 5) global and domestic economic down cycle: and 6) outbreak of epidemics and natural disasters.

06 January 2011


Please refer to the firm's disclosure website at www.credit-suisse.com/researchdisclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names. As of the date of this report, Credit Suisse Securities (USA) LLC makes a market in the securities of the subject company (HTHT.OQ). Important Regional Disclosures Singapore recipients should contact a Singapore financial adviser for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (SVN.N, HTHT.OQ) within the past 12 months.

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06 January 2011 Asia Pacific / China

Equity Research

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