Sector Watch: Let the games begin

Lisa Springer | Apr 02, 2008 6:20am EDT | 2 Comments

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It’s that year again, when the torch is lit and the world turns its attention to the most talented athletes on the planet. With piqued attention comes piqued spending: the Beijing Olympics are expected to draw 4.5 million tourists to the city in 2008, with inbound spending by visitors to the games estimated at $4.5 billion. Beijing is not China’s only winner in Olympic tourism — 90% of overseas visitors to the city plan to visit other Chinese cities as well.

Not bad, especially if you’re Home Inns & Hotels Management, Inc. (Nasdaq:HMIN) and AirMedia Group Inc. (Nasdaq:AMCN), two companies catering to the wanderers of the world.

Home Inns & Hotels is China’s leading budget hotel chain and benefits directly from tourism growth. The company operates hotels across China under its well-known Home Inns brand name. At year end 2007, the Home Inns chain consisted of 266 hotels across 66 cities in China, including 195 leased-and-operated hotels, and 71 franchised-and-managed hotels. Home Inns & Hotels has experienced rapid earnings growth, with per-share earnings rising 46% annually over the past three years.

During 2007, Home Inns & Hotels opened 107 new hotels, including 25 hotels acquired from the Top Star chain in the fourth quarter. Occupancy rates in 2007 averaged 91.1% and revenues per available room were RMB163 (approximately $22.33).

The company’s overall revenues grew 72% in 2007 to $138.4 million from $80.7 million and operating income expanded 43% to $14.6 million from $10.2 million. However, per-share earnings declined 43% year-over-year, to $0.50 from $0.83, because of non-cash charges that included foreign exchange losses, share-based compensation, a non-recurring provision for deferred tax assets and restructuring costs relating to the Top Star hotel acquisition.

A typical Home Inns hotel has 80 to 150 guest rooms and a standardized design, appearance, décor, color scheme, lighting scheme and set of guest amenities, including free in-room broadband Internet access and air conditioning. The company plans to deepen its penetration of existing China markets and target new cities with populations exceeding 4 million. At year end 2007, the company had 115 hotels in development.

Analysts believe Home Inns & Hotels can generate 150% growth this year and 55% growth next year. The shares have traded as high as $50 and as low as $17.79 over the past 12 months, closing at $20.61 on Tuesday. My $30 price target is 46% above the current stock price.

While Home Inns & Hotels has lodging covered for tourists, AirMedia Group, Inc. owns the skies: it operates the largest digital media network in China dedicated to air travel advertising. The company has contractual concession rights to operate digital TV screens in 52 airports (including 28 of China’s 30 largest airports), and places its programming on routes operated by nine airlines, including China’s three largest carriers. AirMedia operates 46-inch digital frames and large-size digital frames in several major airports as well as other media platforms such as 360-degree LED displays, mega display screens and shuttle bus displays.

In March 2008, the company announced important new contracts with China Eastern Media Corp, a subsidiary of China Eastern Airlines, and with Shanghai Media Group, China’s second-largest media group. The agreement with China Eastern involves a joint venture between the two companies and long-term concessions for digital TV screens on China Eastern airplanes. As part of its agreement with AirMedia and Shanghai Media Group will begin providing program content, including news, theme programs and documentary clips, on airplanes and in airports that are parts of AirMedia’s network.

AirMedia runs programming approximately 16 hours per day, and each program hour consists of 25 minutes of advertising and 35 minutes of non-advertising content.

Advertising fees drive AirMedia’s revenues: the company’s revenues rose 131% year-over-year in 2007 to $43.6 million from $18.9 million. Revenues generated from TV screens in airports improved 156% year-over-year to $26.9 million, reflecting a 30% increase in advertising rates to $949 and a three-point increase in utilization rates.

The number of airports served by AirMedia increased to 39 in 2007 from 28 in 2006. Revenues from TV screens on airplanes grew 128% year-over-year to $11.1 million as a result of a 53% rise in advertising rates to $13,132 for each ad shown and a greater than six-point increase in utilization rates. Adjusted non-GAAP net income (excluding share-based compensation and amortization of acquired intangible assets) rose 246% year-over-year to $14.2 million, or $0.38 per share, from $4.1 million, or $0.14 per share, in the prior year.

Analysts target 70% earnings growth for AirMedia in 2008 and 57% growth in 2009. The shares, which have traded as high as $27, are currently trading near their 12-month low of $15.01. They closed at $16.54 on Tuesday. My $22 price target for AirMedia represents a 33% premium to the recent share price.

About the Author
Contributing author Lisa Springer is an equity research analyst with nearly 20 years of investment research experience. Read More