7Days Inn is one of the largest national economy hotel chains in China. The goal of the company is to provide low price with high quality hotel service to travelers who acquire affordable and comfortable living environment. The latest released news show that the cooperation owns more than 700 hotels and distribute in different locations in almost every major city in China. 7Days has more than 16 million members and the whole hotel system supported by high IT technology, and convenient Web control system. Can you believe that this successful company just went through its 6th birthday? Boquan He, and Nanyan Zheng founded 7Days in Mar. 2005 by starting operating first 7Days hotel in Guangzhou. In 20 Nov. 2009, the company IPO in NYSE with first stock price 11.
Geographical: 7 Days Inn mainly provides economy hotel service in China. The company has business in 89 metropolises in China. Some well-known cities such like Beijing, Shanghai has several 7Days Inns located in different areas of city.
China’s Economy: No doubt that Today’s China has huge momentum on economy growth. The first quarter of Gross Domestic Product (GDP) in China raised 9.7% from the previous year according to People’s Bank of China. This result is contributed by the plenty business activities and interactions between different regions of China. So what is the crucial element of business, it’s people. No matter what purpose people traveling, could be finding job, could be a trip, could be going sign business contracts, but all of these activities contribute huge to China’s economy growth. So the daily movement of population in China is huge, a lot of people come in and out of city every day, This really offer a great opportunity to developing lodging business which provides safe, clean, comfortable and cheaper hotel services.
Boquan He, Co-founder and Chairman
Nanyan Zheng, Co-founder and Director
Harry Ren Zhang, coo and Eric Haibing Wu, CFO
Threat of substitute products: The threat of substitute in hotel business means how easily your customers can switch to your competitors’ hotel. Several factors could cause of switching happens. The first is travelers can easily find the hotels that offers lower price with the same service quality. The second factor is traveler doesn’t need to scarify anything to switch hotel. 7Days’ substitute threat comes from star hotels when they decreasing their price during off seasons. Star hotels have much more rooms than economy hotels, but the occupancy rate is much lower than economy hotels. Star hotels often discount a lot during off seasons to attract customers. The star hotel price even equals to Inn’s price sometime. Theoretically, this could damage economy hotels’ business, but in fact, this could not happen in China, because no matter when, the economy hotel always having almost full occupancy rate, because China have huge population base.
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7 Days Group Holdings Limited Announces May 2012 Investor Conference Participation & Non-Deal Roadshow
May 17, 2012 - 7 Days Group Holdings Limited (“7 Days Group” or the “Company”) (NYSE: SVN), a leading economy hotel chain based in China, today announces that management will conduct a non-deal roadshow in the US during the week of May 21，
This Threat is pretty high for economy hotel business. Both enter and exit barriers are low. Several factors cause this situation for economy hotel business. First of all, the local governments in China create low barriers for economy hotel business, because lots of cities are developing with high speed due to high growth of country economy. Lots of cities such like the capital of provinces are expanding the city boundary and lots of city governments have being levied a lot of land from farmers. These lands need to be invested with constriction project. So the government almost allows any projects that can benefit the city development. On the other hand, to invest an economy hotel isn’t spending a lot. In China, to invest an economy hotel with 100 rooms cost about 3-5 million RMB (0.46-0.77M USD), this amount differentiates depends on what company to join with and which city to invest. Lots of economy hotel business base on leasing a building, this will make the cost even lower. Additionally, this kind of investment does not include acquirements of highly specialized technology or equipments. A statistic shows that the current numbers of economy hotels are 2500 in China and the maximum volume for China’s markets are about 10000.
The competition from rivals is intensity, because there are several factors in economy hotel model. The economy hotel scale is large. The increasing in rivalry because all economy hotel companies share the same customers and resources. Second, the switching cost is low. Competitor easily attracts customers by using some promotion such like coupon, free meals, and free picking up. Third, 7Days Inn only serve in China, and its competitors are also very strong, such as China Lodging Group (Hanting Inns and Hotels, HTHT), Home Inns and Hotels (HMIN) and FAST8.
The Buyer Power for 7Days Inn is high, because the huge market shares the company taking in China. In China there are only about 4-economy hotels company share about 90% of the total market, and 7Days Inn is taking about 35% of total. There are not fundamental differences in operating economy hotels business among the competitors. As a consequence, 7Days Inn business has power to set the price (almost every economy hotels in one location are the same). Plus 7Days Inn provides high quality living environment and services in order to create huge membership built strong customer loyalty. Much more customers tend to choose 7Days Inn as their favorite during the trip in cities.
7Days Inn’s suppliers are the investors who directly sign contracts with 7Days Inn’s in order to get authority to use 7Days Inn’s brand name. Those investors often lease storages, abandoned office buildings, or old factories to transform into economy hotels. This all of the decoration design and location chosen must follow 7Days Inn’s requirements. So the supplier power is low since they actually under the control by 7Days Inn’s management, however, the futures are looks good, because they can get pay back in 3 years and have more than 20% each year in future.
Strength: The biggest strength for 7Days Inn is its membership power, because the members contribute 97% of the occupancy rate during 2010. SVN also has very high overnight occupancy rate. SVN’s membership base was increasing steady in recently years. SVN has 14Million membership base in end of year 2010, and up to today, the base has arrived 16Million. The rapid increasing in membership base and steady occupancy contribution rate helps SVN'S net revenue grows significantly. SVN also is an economy hotel business leader in China, and has the fast expanding rate.Another crucial element of strength is its low operating cost. Conversion Cost Per Room is around 7692$ which is under the Industry Average 9375$, Rent Cost is 0.21$/day/sq which is under the Industry Average 0.32$/day/sq, and Staff-to-Room is 0.25staff/room which is under the Industry Average 0.35staff/room.
There are bunch of ways to book room from SVN under the participation of IT, which helps SVN avoid expense to find the intermediate web. To sum up, the biggest strength for 7Days Inn is its ability of fast expansion with low cost.
Weakness: The management of SVN industry is not vertical integrated. SVN expanding through it signs contract with individual investors. This will more or less cause some differences such as living environment, service quality, and additional services in different areas.
SVN is only targeting on customers whose income level around middle, which means SVN losses some high-income level customers. There still some areas where SVN hasn’t cover with.
Opportunities: From my traveling experience in America, almost every economy hotels have delivering service. Sometimes customers are traveling with a lot of equipments. In the case, delivering service will bring a lot convenient for customers especially in some metropolis such as Beijing, Shanghai, and Guangzhou. SVN can set delivering service point at the exit of subway or bus stop.
Threat: The competition within economy hotels market is more intense today. SVN is not the only economy hotel company with high growth rate but also HTHT and HMIN.
Like I mentioned before, SVN sells its room directly without 3rd party’s participations. In China, there are two intermediate webs similar with American’s priceline.com. They are ctrip.com, and elong.com. SVN has to face the pressure comes from intermediate webs, because these webs have more diversities and more easily meet the customers’ requirements.
Competition: To do competition part, I would like to use three economy hotel companies’ transcripts that released at the march 2011. These three companies are SVN, HTHT and HMIN. These transcripts mainly reflect on companies’ performance of 4th quarter. At the year-end of 2010, SVN has 568 hotels which 321 leased-and-operated, and 247 managed. HTHT has 438 hotels which 243 leased-and-operated, and 195 managed. HMIN has 818 hotels, which 454 were leased-and-operated, and 364 were managed, the pie graph below shows the distribution of these three economy hotels. From the pie, we can find that SVN, HTHT, and HMIN together almost have ¾ economy hotels from total in China.
In order to measure economy hotels’ performances, Revenue Per Available Room (RevPAR) is an important metric. Based on 2010Q4 financial report, SVN has RevPAR with RMB143.4 in Leased-and-operated hotels, RMB124.9 in Managed hotels. The number is little bit lower than yearly average RevPAR which each is RMB150.0 and 142.7 and 131, because fourth quarter is off-season for traveling. HMIN has RevPAR with RMB163 in FY2010. HTHT has RevPAR with RMB183 in FY2010. Is that mean HTHT did the best job in 2010, the answer is uncertain, because to make this decision, we need to compare other two important data: Occupancy rate and operating expense. After reading the report from all three economy hotels companies, I found that they have similar occupancy rate with around 95%, but their operating expenses is slightly different. SVN’s operating cost is 78.9% of revenue. HTHT’s operating costs is RMB1469.1Million with its revenue RMB1738.4Million, by converting to percentage; HTHT’s operating cost is 84% of revenue. HMIN’s operating costs is RMB2445.6Million with its revenue RMB2976.0Million, by converting to percentage: HMIN’s operating cost is 82% of total revenue. As a result, SVN is winner with the lowest percentage of operating costs over total revenue, because just like the graph shows that SVN generates the highest percentage rate of profit over revenue.
|Profit Per Room||31.017||27.45||29.34|
Investors: Currently, SVN has the highest P/E ratio wich is 60.6. HTHT’s P/E ratio is second high with 40.58. HMIN’s P/E ratio is 33.23. So we get a conclusion that investors are more expecting to generate higher earnings growth by buying SVN stock in the future rather than buying HTHT stock, and HMIN stock. There are several factors leads investors prefer holding SVN. First of all, SVN is the youngest company among these three, when SVN started its business, SVN already had more precise economy hotel business model by observing what HTHT and HMIN did so that SVN avoided many troubles and mistakes. Second, SVN is keeping control of its operating costs extremely low that leads its profit margin above the industry average. Third, SVN’s revenue is steadier, because SVN has more than 16million membership base, and the membership contributes 97% occupancy rate. Finally, SVN is fast growing under a relative safe environment.
From 2007 to 2010, SVN has accrued the most recent Total Net Revenue and its Adjusted EBITDA. Even though SVN was experiencing the losses in 2007 to 2009, SVN’s profit turned to positive in 2009 with its Net Revenue grew from 252.8M in 2007 to 1141.3M in 2009 and Adjusted EBITDA margin went up from -3.3% in 2008 to 20.1% in 2009 but the Net Income in 2009 still negative. In 2010 SVN’s Net Income increased tremendously and reached 133.2million. During the period 2006 to 2009 from when SVN started operating its 1st economy hotel to 2009 SVN’s hotel base reached 337, this indicated that SVN investing a lot in its capital during this period. The good thing is the return on investment in future years is huge. And another important economy hotel business metic is RevPAR that already listed and mentioned in competition section. Return On Asset is a metric that can tell what earnings were generated from invested capital, and the higher the ratio the better. ROA also indicates that the company has high profit margins tend to have low asset turnover. SVN has ROA ratio with 5.6% in 2010 and analysts forecast a higher ratio in 2011.
Free Cash Flow: For economy hotel business, FCF represents the cash that a company is able to generate after laying out the money required to maintain or expand its hotels. Free cash flow is important because it allows a company to pursuer opportunities that enhance shareholder value.. With cash, SVN can find opportunity to operate new hotels and pay dividends and reduce debt. Unfortunately, I didn’t find any resource offers SVN’s 2010 cash flow, but the interesting thing happens in its balance sheet long-term liability. SVN has 110million long-term bank borrowings in end of year 2009, but this part disappeared at the end of the year 2010. However, the Accrued lease payments increased from 117million to 153million.. What does this mean? This means SVN not only had paid off its long-term banks’ debt, but also be able to pay its lease payments by itself without any help from banks. This also indicates that SVN’s Cash flow is health and FCF increase a lot.