HTHT 华住

Operator

Ladies and gentlemen, thank you for standing by and welcome to the China Lodging Group Q4 and full year 2012 earnings conference call. (Operator Instructions). There will be a presentation followed by a question and answer session. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday the 7th of March 2013. I would now like to hand the conference over to your first speaker today, Miss Ida Yu. Thank you. Please go ahead.

Ida Yu

Thank you, Ben, and Hello, everyone. Welcome to our fourth quarter and full year 2012 earnings conference call. Joining us today is Mr. Qi Ji, our Founder, Executive Chairman and CEO Mr. Xie Yunhang our COO and Jen Zhang our CFO who will elaborate on our company’s development strategy and performance for the fourth quarter and full year 2012. Following their prepared remarks, management will be available to answer your questions. Before we continue, please note that the discussion today will include forward-looking statements made under the Safe Harbor provision of the United States Private Securities Litigation Reform Act of 1995. Forward-looking statements involve inherent risks and uncertainties. As such, our results may be materially different from the views expressed today. A number of potential risks and uncertainties are outlined in our public filings with the SEC. China Lodging Group does not undertake any obligation to update any forward looking statements, except as required under applicable law. On the call today, we will also mention adjusted financial measures during the discussion of our performance. Reconciliations of those measures to comparable GAAP information can be found in the earnings release that was distributed earlier today. As a reminder, this conference call is being recorded. The webcast of this conference call, as well as the mandatory presentation slides are available on the IR section of China Lodging Group's website at ir.htinns.com. Now I would like to turn the call over to Mr. Ji who will be speaking in Chinese and his statements will be translated into English. Qi Ji, please.

Qi Ji

[Foreign Language – Chinese] [Interpreted] Good morning everyone. Thank you for joining our earnings conference call today. In 2012, we delivered solid operating and financial results with 342 new leased and manachised hotels added RevPAR increasing 2% and the like-for-like same-hotel RevPAR increasing 6%. Our full year net revenue grew 43% exceeding our previously announced guidance by 2%. Operating margin expanded two percentage points year-over-year. We are leading in the industry for count growth and profitability. As a Founder, what makes me more excited about is the growth of our new brand as well as our initially formed multi-brand value. To view the multiple brands it’s our core strategy to create shareholder value in the long run. In November 2012, we officially changed our Chinese Company name from HanTing to HuaZhu. As shown on page three of our presentation, HuaZhu brand’s top value covers economy, mid-scale and up-scale hotel segments addressing a wider shopping accommodation market with a wide range from RMB100 to RMB1000. We will continue to work to strengthen each of our brands and expect each brand will serve a successful consolidator for each respective hotel. We show the positioning target customer and the typical price range for our five brands separately from page four to eight. First of all, let’s take a look at HuaZhu economy hotel brands HanTing on page four. HanTing has a total of about 900 hotels, covering about 170 cities in China. Neat, concise and better, HanTing is favored by knowledge workers, value and quality-conscious travelers. As a well-established and rapidly growing, it’s the high-end economy hotel brand. HanTing continues to strengthen its brand awareness and reputation in the market and has become a well trusted brand name among franchisees. In the coming years, we will further accelerate the growth of HanTing by increasing new opening of manachised hotels. On Page 5, Hi Inn is the other economy hotel brand in our portfolio with 40 hotels in 20 cities. The core of this brand is simple, happy and good-value-for-money. Hi Inn is typically priced from RMB100 to RMB200 per room night. As a lower end economy hotel brand, Hi Inn offers value hotel stay for the practical and price-conscious travelers. Hi Inn have attracted a number of loyal customers with its features of good-value-for-money (inaudible) atmosphere. In 2013, we will gradually accelerate new openings of HI Inn. We expect this brand to be leading in scale and profitability in the lower priced hotel markets in the next five years. On page six, those are pictures from our hotels, our new Ji hotels in Shanghai. Our new Ji hotel, previously season hotel is a standardized mid-scale hotel brand with premium locations at essential business districts in major business cities in China. Ji hotel delivers high quality stay feeling for mature and experienced travelers. The typical price range is RMB250 to RMB500 per room night. At the end of 2012, we had 32 Ji hotels in 15 cities across China. With Chinese travelers consumption upgrade, with lead Ji hotels has a wide market. In 2013, we will also accelerate new openings of Ji hotel to at least double the number of hotels during the year. Let’s turn to page seven. Starway is the mid-scale hotel brand in our portfolio through acquisition with rich and colorful design, Starway satisfies the needs of middle-class white collars who seek a good location, reasonable price and guaranteed quality. The typical price is RMB250 to RMB600 per room night. In such, Starway adopted a straight franchise model and in which Starway does not directly manage any of the hotels. After the acquisition in the second quarter of 2012, we converted the business model through leased or manachised. At the end of 2012, we had two leased hotels and nine manachised hotels under the Starway brand name. We believe that the model shift will bring our customers a more reliable service, our franchisees a more attractive financial return and us a high value and a profit from the business. We will maintain as part of the Starway hotels with no appointment of hotel general manager, but we will not add new purely franchised Starway hotels. Going forward, Starway has mainly adopted the manachised and the leased model about 50 franchised Starway hotels will be remained in the lodging group as we expected. Starway brand developed to certainly consolidate existing three to four star hotels and along with Ji hotels to capture the enormous growth opportunity in the mid-scale hotel segment. Last but not least, on page eight, Joya Hotel is the first up-scale hotel brand in our portfolio. Joya is uniquely positioned as exquisite up-scale hotel with a combined sense of quality, technology and art to deliver a unique low-key luxury to elite travelers. Words like wise, humanity and elegant exemplify this brand. This first Joya hotel is expected to unveil in the second half this year in Wuhan City. From our estimate, the typical price range is RMB500 to RMB800 per room night in second tier cities and RMB600 to RMB1000 per room night in first tier cities. In addition to elegant in Joya hotel our customers may also expect to have upgraded dining and fitness facilities in all of their managed days at Joya. The unique portfolio with five brands we are still anticipating our high growth in the next five to ten years. As shown on page nine we expect to have approximately 2500 hotels by 2016 and 5000 hotels by 2021 implying our hotel growth CAGR of 25% from now till 2016 and 15% from 2016 to 2021. We will primarily focus on economy and mid-scale hotel sectors and we will also explore other attractive in the market in the future. By 2016, we expect our two economy hotel brands in combination to exceed 2000 hotels accounting for 80% to 84% of the portfolio. In the two mid-scale brands to reach 400 to 500 hotels accounting for 16% to 20% of the portfolio. We are very excited with the tremendous opportunities offered by fast-growing Chinese travel and lodging market. We are confident that, our multiple brand strategy will enable us to grow into one of the top ten hotel groups globally by 2021. With that, I will turn the call over to Mr. Yunhang Xie, our COO who will report our operating performance in Q4 and full year 2012. Mr. Xie, please.

Yunhang Xie

[Foreign Language – Chinese] [Interpreted] Thank you, Qi Ji and hello everyone. As mentioned by our company’s CEO just now HuaZhu again achieved record and sustainable growth in 2012 leading the industry in terms of the hotel network expansion and top line growth. As shown on page 11, for the fourth quarter of 2012, we opened 50 new leased hotels and 70 net new manachised hotels. For the full year of 2012, we opened 121 net new leased hotels and 221 net new manachised hotels, totaling 342 exceeding our previously announced guidance. At the end of 2012, we had 1035 hotels in operation, among which 45% are leased hotels and 50% are manachised hotels and the remaining 5% are franchised Starway hotels. Now please turn to page 12. In the fourth quarter, the occupancy for all hotels reached 92% a decrease of one percentage points year-over-year, mainly attributable to higher percentage of manachised hotels in ramp up stage during the fourth quarter of 2012 as compared to a year ago. The ADR for all hotels was RMB172, a decrease of 2% year-over-year. In the fourth quarter of 2012, we had a year-over-year increase of 2% in same-hotel ADR offsetting the price impact resulted from city mix shift towards lower tier cities. The accelerated growth of our manachised business will drive a higher percentage of new hotels in tier two and tier three cities, compared with our lease business. For the full year, our occupancy was 94%, a year-over-year increase of two percentage points. ADR reached RMB178, a year-over-year decrease of 1%. As a result, as shown on page 13, the RevPAR for Q4 being at RMB162, a year-over-year decrease of 3%. For the full year, the RevPAR reached RMB168, an increase of 2%. In the context of leased and the manachised hotel rooms growing by 51%. The solid growth in our full year RevPAR has justified our strong operational capability and the brand power. Page 14 provides a detailed view of our same-hotel RevPAR churn. For the hotels in operation for at least months. In the fourth quarter of 2012, our same-hotel RevPAR appreciated by 2% with a 1% increase in ADR and one percentage point increase in occupancy. In the full year of 2012, our same-hotel RevPAR appreciated by 6% with a 2% increase in ADR and three percentage points increase in occupancy. Compared with the previous three quarters in 2012, our Q4 same-hotel RevPAR growth is relatively softer, mainly because of some slowing of Chinese national economic activities during the country’s recent leadership transition and the higher year-over-year comparisons in Q4 2011. Consistently, HuaZhu maintained our leading position in same-hotel RevPAR growth in the industry. The page 15 will provide more color. Our full year same-hotel RevPAR appreciated 6% while Home Inn same-hotel RevPAR for the first three quarters of 2012 was almost flat. Thanks to our strong brands, highly motivated workforce and a well-established management system, HuaZhu achieved solid same-hotel RevPAR improvement for each quarter. In the future, we will continue to strengthen our brand portfolio, enhanced profit productivity and a better satisfied customer needs through continuous improvement of our management system and application of new technologies. Now I would like to turn over the call over to Jenny, our CFO who will share with you more details on financial results. Jenny, please.

Jenny Zhang

Thank you, Yunhang and hello everyone. In 2012, we were gratified to see a very strong revenue growth and a significant improvement in operational margin. Let me walk you through the details. As shown on page 17, our Q4 net revenues increased 36% year-over-year, exceeding the high end of our quarterly guidance by 5%. Leased hotels revenue grew 32% and the manachised and the franchise hotels revenue grew 67% year-over-year. This quarter, our manachised and the franchise hotels revenue reached 11% of our total revenues. For the full year, our net revenue increased by 43%, exceeding the high end of our guidance by 5%. Page 18 shows the adjusted quarterly EBIT margin, which decreased by 1.9 percentage points in Q4 of 2012, when compared with a year ago. As Yunhang mentioned earlier, Q4 was a relatively slow quarter in terms of revenue due to the government transition and we had a high comparative dates. Those factors have partly cut inflation led to an increase of adjusted hotel operating costs as a percentage of net revenues. Preopening expenses as a percentage of net revenues also saw a 0.3% increase due to large amount of new leased hotel openings this quarter and also a very strong pipeline. Our SG&A expenses as a percentage of net revenues continued to show a decrease year-over-year this quarter. Owing to our cost control efforts and the benefit of economies of scale. On a full year basis, we are pleased to see our adjusted EBIT margin increased by 1.9 percentage points as shown on page on 19. Contributing to the margin improvement, the preopening expenses as a percentage of net revenues decreased by one percentage point mainly due to extension of our revenue base. On top of that, adjusted SG&A expenses decreased by 1.3 points, mainly due to our cost saving efforts and the benefit of economies of scale. On the other hand, cost inflation caused pressure on the adjusted hotel operating cost which posted a 0.4 percentage point increase. We experienced significant increases in personnel, renovation, food and consumables costs. We will continue to work on the major cost items in 2013 with further enhancements of employee productivity and the tightening of cost control. In our current inflationary environment, maintaining our leading position and the workforce productivity is core to our business success. As shown on page 20, our hotel personnel cost as a percentage of net revenues is significantly lower than our competitor Home Inns. Towards streamlining, our workforce, work procedures, sharing resources among our hotels and applying new technology, we used fewer employees per room than our competitor. These are the features makes us more resilient in the phase of salary increases and help us attract an increasing number of high-quality franchisees. Now let’s turn to page 21 for a look at the cash flow. Operating cash flow was RMB191 million for Q4 2012, a year-on-year growth of 41%. For the full year of 2012, our operating cash flow grew 56% to RMB717 million. We are pleased to see that our operating cash flow was able to fund the majority of our cash that was deployed to investment activities which amounted to RMB266 million and RMB1.06 billion for Q4 and full year 2012 respectively. As shown on page 22, we closed the year with a net cash balance of RMB460 million. On top of that, we had RMB800 million of committed credit facilities available, but unused at the time. We believe that our cash balance, our future operating cash flow and our available credit facilities will be sufficient to fund our expansion projects in the near future. Last but not the least, as shown on page 23, in 2013 we plan to open 100 to 110 leased hotels and 230 to 270 manachised hotels. Out of the 330 to 380 new openings, we expect to open one Joya hotel, 55 to 65 mid-scale hotels on the Ji hotel and the Starway hotel brands and 275 to 315 economy hotels under HanTing hotel and the Hi Inn brand. We expect to achieve net revenues in the range of RMB845 million to RMB860 million in the first quarter of 2013 representing a 30% to 32% growth year-over-year. For the full year of 2013, we expect net revenues to grow 26% to 29% from 2012. With that, let me turn the floor to questions. Operator?

Operator

(Operator Instructions) The first question comes from the line of Lin He calling from Morgan Stanley. Please ask your question.

Lin He

Hi, good morning. Thanks for taking my question. My first question is about your expansion. If we look at expansion target for this year, Seasons Hotel or Ji Hotel is the area which we will see highest growth. So my question is what makes you so positive on this segment? And what will the financial impact be for opening – for accelerating the increase or growth of Seasons Hotel? And what is the split of Seasons Hotel you are going to open this year? Thank you.

Jenny Zhang

Thank you, Lin. We have seen a very positive return track record of our Ji Hotel in the first half of the year. Presently, it has shown a higher IRR during the project lifetime. So that has given us high confidence that this is a market that we should penetrate interest. And also our upgrade of the product design in 2012 were also very well received by our customers. And we have seen a fairly positive customer feedback. That has given us the confidence. And in terms of financial impact, I want to make this aware by everyone that Ji Hotel in nature because of its larger growth comp as well as certain location, certain property it will incur higher eventual cost. And as a result, in the pre opening center sector for a hotel, preopening expense is initially higher than HanTing Hotel as there is similar feature. And also because of the higher components of that, during the renting up, it will also incur a higher per room lot to for the first few months. Even with that, when you look at the whole lifetime of a Ji Hotel, it still generated a higher returns for the shareholders.

Lin He

Sure. Out of those new seasons hotels kind of opened, are they currently, majority FM hotels or leased and operated hotels?

Jenny Zhang

It’s still Season majority be leased hotels, but we also have – start to see a very strong welcome from the potential franchisees. Commonly about 70% of our Ji hotels are leased hotels, gradually we believe the percentage of manachised hotels will increase.

Lin He

Sure, sure. Thanks, Jenny. And my second question is on the cost side, firstly a follow-up what is that just now? How should we think about the opening cost for 2013 given more numbers of openings of Seasons hotel? And two, in this quarter for 2012, I think for labor cost, personnel cost, per unit basis, per room night basis, I think the increase is slightly higher than the 5% to 10% growth guidance you gave earlier. And also we have seen a growth in other cost in Q4 in particularly. How should we think about labor cost and some other major cost lines for 2013? Thank you.

Jenny Zhang

Sure, in terms of pre-opening expenses, the new openings will definitely show a higher mix of Ji hotels. So we expect total hotel preopening expenses to be higher than 2012. As a result, but on the other hand there is a number of new openings, currently we are expecting slightly lower than 2012 in total. So if you combine those two components together, we expect to see a moderate increase of preopening expenses in 2013. As a percentage of our revenue, preopening expenses percentage is expected to decrease in 2013. In terms of the hotel operating costs, we are seeing two components playing there. One has for the majority of hotels; we expect the hotel income margin to be stable at around 22%. And the manachised hotel margins are also expected to be generally stable. But the opening of more Ji hotels and also our continued penetration into newer cities are likely to increase the loss coming from the rents of the hotels. So as a result, we expect the hotel operating cost as a percentage of our revenue will increase in 2013 as compared with 2012. And the major driver will come from personnel costs, as well as rental

Lin He

Sure, so is it fair to assume that you are expecting a margin decrease in 2013, because on what you said just now?

Jenny Zhang

We are seeing some favorable and there is some unfavorable. Currently we are expecting that our hotel operating cost as a percentage of revenue to increase, but we are also expecting preopening and SG&A as a percent of revenue. Currently we are expecting those two factors largely offset each other, so we are expecting a generally stable low EBIT margin as at the moment.

Lin He

Sure, sure. That’s very helpful. Thanks Jenny.

Jenny Zhang

You are welcome.

Operator

And the next question comes from the line of Jamie Zhou calling from Macquarie. Please ask your question.

Jamie Zhou

Hi Jenny. Congratulations on the good set of results and a very strong year. My first question is on the very strong pipeline of your franchised hotels or should I say manachised hotels. Can you give us a sense of how many of that is in the economy hotels and how many of that is actually in the mid-scale Ji hotels and potentially in the Starway hotels?

Jenny Zhang

Currently the significant majority is still in the HanTing hotels, but we clearly are seeing quickly growing pipeline for our Seasons hotels, Hi Inn, as well as the Starway hotels.

Jamie Zhou

Okay, and earlier you mentioned that you are still looking at adding most of the Ji hotel as leased and operated hotels this year. Under what circumstances would you consider opening this trend up for franchising?

Jenny Zhang

We have always being open to receive franchise request to open a Ji hotel. Further we are fairly strict in terms of the quality standards they need to meet and also we are very selective in terms of location and the cities of those new hotels. As a result, we are seeing in the new hotels that we start to open in 2013, about one-third are going to be manachised hotels and about two-thirds are going to be leased hotels under the Ji brand.

Jamie Zhou

Okay, that’s helpful. Thank you. Just also follow-up on to that. On the current CapEx can you give us a sense of what the different CapEx per room for each of your brands are for the leased and operated please?

Jenny Zhang

Sure. Our Ji hotels are expected to have a proposed CapEx around RMB100 to RMB120 and our HanTing hotel is expecting to be around RMB60, 000 to RMB70, 000 and currently the Hi Inn still has a wider definition. Once the model is stabilized, we expect it to be around RMB45000 to RMB50, 000 per room.

Jamie Zhou

Okay, that sounds like an increase from your previous guidance. I believe you previously said that Ji hotels are a revamp version of the Ji hotels was around RMB85, 000 to RMB90, 000, can you give us a sense where the cost increase is coming from?

Jenny Zhang

Sure, compared with two or three years ago, we did increase the CapEx standards for Ji hotel, mainly to further distinguish it from our HanTing hotels and the major – in the market. It just opens a view of hotels under the new standards last in Shanghai and you are welcome to take a look at it while you visit Shanghai next time.

Jamie Zhou

Okay, thanks and my last question is on, I guess over the last year or two, China Lodging Group has made significant progress in revamping themselves and transforming them from an economy hotel, limited services hotel group to a more true multi-brand hotel group. Now my question for the management team is what kind of challenges are you foreseeing on a number of fronts such as maybe in personnel, training, or just competing with more of a post service hotel category and will you consider in the longer term partnering with a strategic partner in the longer term? Thanks.

Jenny Zhang

Jamie, I am not sure, I capture the essence of the question. Could you repeat it?

Jamie Zhou

Sure, as we have seen over the last year or two, our company has transformed from what was predominantly an economy hotel to – we now have five brands capturing in pretty much from the economy budget to mid to high scale hotel categories. As we move up the value chain of the hotel, since we are entering into territories that we are not familiar with such a highest level services and bigger and better hotels. What kind of challenges are we facing at this point? And how are we tackling those challenges? And will we consider in the longer term bringing a strategic partner? That’s my question.

Jenny Zhang

Okay. Currently we don’t have a lot of strategic plans in terms of strategic partners. When we develop a new brand the challenge is always there that how do we view that in terms of the business model that can makes business sense to us. The price and the product quality make sense to the consumer and also the returns profile is a character in that that we can consolidate the existing facility. So those are the core posture that we need to answer when we build up a new b rand. So naturally, there is always try and error process while we are entering to a new section of the market. We are very pleased to see that for our efforts has been well paid back that we have achieved early success in the Seasons or now Ji hotel as an exploration. We also have filed and they approved the return profile for our Hi Inn and there is our new business Starway hotel and Joya clearly we are also going through that churn process. But we are confident that we have the best talents and the solid experience in terms of fueling new brands in the company.

Jamie Zhou

Okay, great. Thanks and congratulations again.

Jenny Zhang

Thank you, Jamie.

Operator

And the next question comes from the line of Justin Kwok from Goldman Sachs. Please ask your question.

Justin Kwok

Hi, morning. Thanks for taking my questions. I guess I have two questions; one is on your revenue guidance. I want to get a sense on how much do you think is from the unit growth, and your view on the same-hotel RevPAR growth that you have factored into the full year revenue guidance? That’s my first question.

Jenny Zhang

Sure, it’s starting on this year to have a moderate same-store RevPAR growth. For Q1, the expectation is actually relatively low. We are expecting around 2% and for the last half of the year we are expecting 2% to 4%. So if you blend it altogether for the full year, we are currently expecting 2% to 3% same-hotel RevPAR growth.

Justin Kwok

Thanks. Would that be mostly driven by room rates or do you still see occupancy on the rise as I think last year you have both attributing to the RevPAR growth in a way?

Jenny Zhang

We believe most of the growth will from ADR appreciation.

Justin Kwok

Okay, thank you. And my second question is, just wanted to get a sense on the first quarter operation, especially after the Chinese New Year seasonal low, because I guess in the last year when you reported, you mentioned that you have stepped up a lot of your own marketing efforts after the Chinese New Year in order to help on the occupancy which we did see a very strong pick up in occupancy after the Chinese New Year back in 2012 first quarter. Are you doing the same thing for this year, or are you seeing a different way and what are you seeing in a market where are you seeing people being competitors or the other OTIs being less aggressive or more aggressive in expanding coupons marketing or other things. I just want to get a sense on the recent operations. Thank you.

Jenny Zhang

As we have mentioned about a year ago we (inaudible) Q4 2012 and Q1 2013 to be relatively soft in a general market situation, mainly because of a couple of reasons. One is (inaudible) other low season for traveling. And then secondly the general economy has been relatively slow during the season two. We see that – there has still be persisting or through the positive months. And thirdly, we are seeing higher volatility in terms of customer growth because of the boom of the leisure traveling in China. Those travelers has a stronger seasonality. So likely the boom in the leisure traveling are going to further increase the gap between the low seasons and the high seasons. So far in the first two months, our hotel performance is generally in line with our expectations. And the pick up after the Chinese New Year has been healthier so far. So we are generally positive on the whole economy return in the second – economy recovery in the second half of this year. And as the high season is coming in March and April, we are also seeing positive signals of customer flow strengthening.

Justin Kwok

Thanks, just a quick follow-on your comments as you said you see more leisure customer mix in your portfolio in the recent past, are they going to remind us in terms of the percentage mix of what level of leisure customers are you serving now in your customer base?

Jenny Zhang

We did about a year ago indicate that about 40% to 50% of our customers are staying for leisure visits.

Justin Kwok

Thank you.

Jenny Zhang

You are welcome.

Operator

And our next question comes from the line of Ella Ji calling from Oppenheimer. Please ask your question.

Ella Ji

Thank you and good morning. So, firstly I want to ask about the occupancy trend actually your new Ji hotels it seems that last year, how is that trend? And approximately what is the occupancy rate for these hotels now? And also what’s your targeted occupancy rate for the Ji hotel that you are going to open in the next few days?

Jenny Zhang

So far our mature Ji hotels had occupancy around 95% and we expect over two or three Ji will be at the similar level. The recent expansion of room count may bring it up by a couple times, but we are confident the year long occupancy from matured Ji hotel will still be above 90%.

Ella Ji

Okay great. And then, I want to ask about, given that you are having a higher manachised mix and what’s your total number of franchisees that you have now? And how many of them have let’s say hotels of – have more than five hotels?

Jenny Zhang

Currently about one-third of our manachised hotels are with franchisees who have maximum hotels with us. And there we have I think about half a dozen franchisees not have more than five hotels.

Ella Ji

Okay, great. Lastly just a follow up, what’s the CapEx per room for the Joya hotels?

Jenny Zhang

This is our (inaudible) we are yet to find out the actual number.

Ella Ji

And do you have like rough estimation?

Jenny Zhang

Currently, we are estimating it at around RMB200, 000 per room.

Ella Ji

Okay, great. Thank you.

Jenny Zhang

You are welcome, Ella.

Operator

And the next question comes from the line of Fawne Jiang calling from Brean Capital. Please ask your question.

Fawne Jiang

Thank you for taking my questions. First one is regarding the store opening schedule for the year. Are we expecting to see a more even out store opening schedule or it will be similar to 2012 which is more a back-end loaded?

Jenny Zhang

You have to see in the past here, typically, we will have four hotels opening in the fourth quarter. As there – as last year 2012, these were kind of extreme that we had 50 new leased hotels opened in the last quarter and about 27 opened in the third quarter. This year, based on our pipeline figure we still expect the majority of our leased hotels are going to be opened in the second half of the year. But we do expect the pattern to be somewhat even up compared with the extreme of 2012.

Fawne Jiang

Got it. Thanks, Jenny. Second question is actually regarding your cash flow I just see the quick estimate. Based on your existing store opening schedule as well as the CapEx you have just walked us through, it seems that you are going to spend somewhere around $185 million to $200 million for 2013 on the CapEx and that you have around 75 million cash in hand. So that means, for your operating cash flow you have to generate around 110 to 120-ish. You did actually similar that in 2012. But I just wondered like it seems to be pretty tight cash flow overall. Just wondering whether at certain point you may need to tap additional funding for the growth?

Jenny Zhang

My mind is quickly working (inaudible) stronger volume and I think your CapEx estimation about $185 million to $200 million is roughly right. And given we currently have the available funding of RMB1.6 billion and also we expect some flow on our operating cash flow. So I believe available funding in the past our operating cash flow will be above RMB2 billion. So you could translate that into US dollars that will be somewhere about a little more than $300 million. So I believe it will be more than sufficient to cover our investment needs in 2013.

Fawne Jiang

Got it. That’s very helpful. Thank you very much.

Jenny Zhang

You are welcome.

Operator

And the next question comes from the line of (inaudible)

Unidentified Analyst

Hi, Jenny.

Jenny Zhang

Hi.

Unidentified Analyst

I have two questions. First, given the HanTing is a mature brand and what will be the long-term percentage of the leased and the manachised hotel for HanTing brand, because I know I see, maybe one-third is leased and two-thirds are manachised for the new opening but what will be the long-term trend?

Jenny Zhang

We expect the manachised hotel as a percentage continue to increase from where it is today. Therefore by 2013 we are expecting that leased hotels to be somewhere around 25% to 30% for the HanTing brand.

Unidentified Analyst

So what will be the long-term target the HanTing’s long-term strategy for HanTing as a brand? Will it be like just like choice hotel where most of the – I mean, almost 100% are been franchised and manachised?

Jenny Zhang

We feel that the long-term depending on how long we are talking about. You heard us talking about the scope of ten years, likely the leased hotel percentage will further decrease from the 25% to 30% as we expect for 2016. But, we do need to keep a certain amount of new leased hotel opened each year for a few purposes, one is that it’s essential we offer new brand developments, and secondly, it’s important to have this in states in certain regions to attract the franchisees. So we believe in the long run, we will still maintain our 20% to 30% of leased hotel in our portfolio.

Unidentified Analyst

Understood and also I want to ask about, currently, do you record maintenance CapEx or maintenance expense in the financial statement and what will be your estimate for HanTing hotel in terms of maintenance CapEx during the first 12 to 15 years lease term?

Jenny Zhang

Currently we haven’t separately reported then maintenance CapEx. The number is already included in the overall CapEx spending that’s reported in our 8-K.

Unidentified Analyst

But what would be the estimate maintenance CapEx for a hotel or the first lease term?

Jenny Zhang

You may estimate the CapEx, maintenance CapEx each year to be somewhere around 2% to 2.5% of our net revenues.

Unidentified Analyst

Okay. Understood and then a more general question for Mr. Ji I will ask in Chinese. [Foreign Language – Chinese]

Qi Ji

[Foreign Language – Chinese] [Interpreted]

Unidentified Analyst

Thank you Jenny.

Jenny Zhang

Thank you. Let me do a very quick translation for Mr. Ji and the question. The first one is relating to, what are the main drivers as we grow and where the pressure will come from? And Mr. Ji’s answering, it will first come from the competition and then secondly, it will come from the all kinds of uncertainty in the domestic economy. And then the follow-up question is on, how will the competition impact our business? And where we see as you grow positively (inaudible). So Mr. Ji further elaborates, your competition will definitely cause pressure on the eventual cost as well as that too much capacity increases and in terms of general – on the other hand the competition also force everyone to become more cost-efficient. And to-date, the market situation, the competition between the few major players actually made each one of them a more stronger player and that accelerated result of more and standalone hotels. And in terms of the macros that Mr. Ji posted that, economy hotels in nature is resilient to the macro situation. In general, we are positive about what the new company is going to do with the travel industry. From a few policies they have issued recently, we believe the government are going to provide positive environment and they are even providing incentives for people to travel including these policies enforcement are going to – will accelerate the settlement of leisure travel market. With that, I guess we will have to conclude this to the time limit. First of all, thank you everyone for attending our call today and we are here very open to your follow-up question either can be reached to our IR email address. And we want to make you aware that we will participate in the Credit Suisse Asian Investment Conference from 18 to 20 in Hong Kong and also the JPMorgan China Forum on April 11 in London. So we look forward to talking to you in the next quarter earnings call. So, bye everyone.

Operator

Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.