Hotel Development Summary:

With the hotel business, there are 3 types of business models lease-and-operate, franchising, and consulting. Lease-and-operate is the most common model whereas the hotel property is leased and the hotel operator develops and operates the hotel. With the franchise model, a hotel operator pays franchising fees to the hotel management company to use their brand and to be included in their hotel network. The hotel will also receive training, support, and marketing help from the franchising company. Consulting services charge a fee to provide advice for hotel developers; consulting services are typically included with hotel franchises. The types of services they provide include: Development Franchise Operations: Provide brand, training for your manager and staff, sales, marketing, and global reservations system to bring guests to hotel Management Services: Project Development: Convert property to fit a certain brand. Support Architecture and Construction: Group that provides guidance through stages of property development. Consisting of architects, designers, engineers, interior designer. New Builds and Transition: Assists with developers to set up the following areas: Operations, Food and Beverage, Sales and Marketing, Human Resources, and Information Technology.

Development:
Hotel Development Identify potential new markets and perform a comprehensive study of each new market by visiting the site and gathering background information, such as regional economic conditions and availability of existing hotel services in the prospective new market. Then they select the ideal hotel locations in the chosen market. Once the site is selected, negotiate with the property owner while conducting diligence on legal and regulatory aspects, including owners land title and zoning regulations. They lease properties from real estate owners and convert the property to hotels. Before completion of construction, they carry out pre-opening activities such as appointing the general manager and hiring and training new staff members. It typically takes 4 to 6 months from execution of a lease to hotel opening. Capital expenditures include investments in furniture, fixture and equipment, technology. Market criteria Economic growth: Cities with business activities measured by employment opportunities, population growth rates, tourism and convention activities, air traffic volume,

commercial real estate occupancy and retail sales volume. Identified 100 cities in china, including cities with population over 4 million, annual GDP over RMB80 billion. Favorable development environment: minimal zoning requirements and absence of lengthy local development approval and registration process, as well as availability of suitable sites and construction contractors. Specific hotel Criteria Location and Market Appeal: location near business and leisure centers that generate broad demand. Drivers include transportation hubs, convention centers, business parks, shopping centers and retail areas, major highways, tourist spots, major universities and culture and entertainment centers. Size and facilities: hotels with 80 150 guest rooms. Leasing Under PRC law, all lease agreements are required to be registered with the local housing bureau. The annual rent for each hotel ranges from RMB0.6 million (US$.08million) to RMB 5.2million (US$0.7 million), depending on the location, size, and condition of each property. Each lease ranges from 8-20 years, most of which are in 15 years. Legal and Regulation with Zoning and Development Urbanization and changes in zoning and urban planning may cause properties to be demolished. China is undergoing rapid urbanization, and zoning requirements and other government mandates concerning urban planning may change time to time. Furthermore, each hotel is required to obtain a special industry license issued by the local public bureau, and to comply with license requirements and laws and regulations with respect to construction permit, fire prevention, public area hygiene, food hygiene, public safety and environment protection. Technology Real-time inventory management allows the lowering of booking costs relative to competitors and efficiently manage room inventory across hotels to maximize occupancy. They track industry wide room pricing information to determine pricing structure across products, locations, and seasons to enhance RevPAR by optimizing daily room rate and occupancy. The system is also capable of tracking and monitoring data of individual and corporate members to manage membership loyalty. Central reservation system that is online 24/7. Allows reservations through website, call center, travel agents, and online reservation partners. Customer relationship management (CRM) maintains information on members, including loyalty points accumulated and redeemed, prepayment, and balance. Employees Hotel staff and corporate staff have received 70 and 40 hours of training.

Development Time Newly opened leased and operated hotels incur significant pre-opening expenses at the development stage and generate low revenues at the ramp-up stage. New hotels go through 3 stages development, ramp up, and mature operations. The hotel may not be profitable until the maturity stage. During the development stage, the lease and operated hotels incur opening expenses ranging from RMB1 million RMB2 million per hotel. It typically takes 3-6 months to ramp up. Mature hotels are defined as having more than 6 months of operations. Price Room rates primarily based on location of hotel, room rates charged by competitors in same locality, and relative brand and product strength in the city. Typically charge between RMB150 RMB200 per room night range and the higher end is priced at RMB200 RMB300 per room night range. Operating Costs Hotel Operating Costs: rental payments, utility costs, compensation and benefits for hotel based employees, costs of hotel room consumable products, and depreciation and amortization of leasehold improvements. Selling and marketing expenses: commissions to travel intermediaries, expenses for marketing program and materials, bank fees for processing bank card payments, and compensation and benefits for sales and marketing personnel. Pre-opening expenses: Rental fees and personnel costs. Typical annual operating numbers for a hotel.
Operating costs per hotel Rents and utilities Personnel costs Depreciation and amortization Consumables, food and beverage Others Total hotel operating costs Selling and marketing expense General and administrative expenses Pre-opening expenses Total operating costs and expenses RMB 1,932,988 821,743 555,916 494,982 310,323 4,115,952 244,371 489,012 647,078 5,496,413

(Numbers are calculated, not representative because not provided by company)

Industry Information
RevPar RevPar is an important metric used to measure management performance. It calculates the revenues generated per room. Hoteliers goal is to maximize this number and is used as a benchmark to compare performance between competitors. REVPar = room sales/room nights available. Or occupancy rate x average daily rate

China Economy Hotels Market Share China Lodging Group (HTHT US) Hanting Inns and Hotels. 5th market share holder in China Operates 173 hotel chains. Franchises 63 Market Share: 7.5% Home Inns is the largest budget hotel chain in China (HMIN) Market Share: 17.3% Motel Market Share: 9% Super 8: Market Share: 3% Vienna Hotel 1.1% Jin Jiang Inns Market Share: 10.6% 7 Days Inn Market Share: 8% Green Tree Inn Chain Market Share: 4% Ibis Market Share: 1.6% Other Market Share: 37%

Source: Guotai Junan (HK) Research note

http://bg.panlv.net/file2/2010/03/17/3342baac331c9d35.pdf

Case Studies China Lodging Group (HTHN Hanting) Prospectus

http://www.sec.gov/Archives/edgar/data/1483994/000095012310028694/h03703b4e424b4.htm

39 Cities, 236 Hotels, 6,181 Staff Members, 28,360 Rooms, 1,505,442 Club Members Cayman Islands corporation. Three hotel products to distinct groups of customers HanTing Express Hotel: Knowledge workers and value-conscious travelers. Flagship HanTing Seasons Hotel: Mid-level corporate managers and business owners. Premium HanTing Hi Inn: Budget constrained travelers. Low end Utilize lease and operate model. Directly operate hotels in prime locations. Lease properties from real estate owners or lessors. Responsible for hotel development and customization, as well as repairs and maintenance, operating costs and expenses of property. Also responsible for supervising the hotel managers and employees required to operate hotels and purchasing supplies. Lease range from 10-20 years. There is a 3-6 month rent free period and they pay a fixed rent on a monthly or quarterly basis for the first 3 or 5 years of the lease term. Typically subject to a 3% to 5% increase every 3-5 years. Competitive Strengths: 1) Premium brand. High REVPar and occupancy rate 2) Portfolio of diversified products 3) Strong return driven development model 4) Efficient and scalable operating system supported by technology platform Real-time inventory management allows the lowering of booking costs relative to competitors and efficiently manage room inventory across hotels to maximize occupancy. They track industry wide room pricing information to determine pricing structure across products, locations, and seasons to enhance RevPAR by optimizing daily room rate and occupancy. The system is also capable of tracking and monitoring data of individual and corporate members to manage membership loyalty. Central reservation system available 24/7. Allows reservations through website, call center, travel agents, and online reservation partners. Customer relationship management (CRM) maintains information on members, including points accumulated and redeemed, prepayment, and balance. 5) Management team and workforce Hotel staff and corporate staff have received 70 and 40 hours of training. Strategy: 1) Network expansion

2) Product diversification and customer segmentation 3) Enhance customer base with loyalty program 4) Invest in human capital 5) Implement cost control measures Risk 1) Economy, competition, and local market conditions Bad economy can hurt occupancy rates Competition based on location, room rates, brand, quality of accommodations and service level. Also compete with 2 and 3 star hotels. New competitors can offer more competitive rates, greater convenience, service amenities or superior facilities. 2) May not be able to identify hotel properties for lease that satisfy the expected economic returns on the lease and operate business model 3) Legal right to lease certain property challenged by property owners or gov regulation 4) Difficult to manage brand and reputation 5) Urbanization and changes in zoning and urban planning may cause properties to be demolished. China is undergoing rapid urbanization, and zoning requirements and other government mandates concerning urban planning may change time to time. Furthermore, each hotel is required to obtain a special industry license issued by the local public bureau, and to comply with license requirements and laws and regulations with respect to construction permit, fire prevention, public area hygiene, food hygiene, public safety and environment protection. 6) Seasonality Revenues fall during New Year and Spring Festival Holiday 7) Newly opened leased and operated hotels incur significant pre-opening expenses at the development stage and generate low revenues at the ramp-up stage. New hotels go through 3 stages development, ramp up, and mature operations. The hotel may not be profitable until the maturity stage. During the development stage, the lease and operated hotels incur opening expenses ranging from RMB1 million RMB2 million per hotel. It typically takes 3-6 months to ramp up. Mature hotels are defined as having more than 6 months of operations. 8) Increase of expenses. A portion of the operating cost is fixed rent and employee salary 9) Interruption on technology platform Web property management. Central reservation and customer relationship management systems. Technology to manage inventory, revenues, loyalty program, and franchisees. Depend on website and call center to facilitate customer reservations. Data management, including credit card numbers and other personal information. 10) Growth of online third party booking systems may hurt profitability as they require a commission for directing customers Rate. Room rates primarily based on location of hotel, room rates charged by competitors in same locality, and relative brand and product strength in the city. 51% of hotel rooms

are priced at RMB150 RMB200 per room night range and 26% of hotel rooms are priced in the RMB200 RMB300 per room night range. Hotel Development Analyzes economic data by city, field visit reports, and market intelligence to identify target locations in each city and develop a 3 year development plan for new hotels. Evaluate each project based on length of investment payback period, rate of return on investment, amount of net cash flow projected during operating period and impact on existing hotel in vicinity. They seek properties that can accommodate 80 160 rooms. Once identified the location, negotiate the lease contract. Then they engage independent design firms and construct companies to work on leasehold improvement. They seek locations near popular commercial and office districts. Operating Costs Hotel Operating Costs: rental payments, utility costs, compensation and benefits for hotel based employees, costs of hotel room consumable products, and depreciation and amortization of leasehold improvements. Selling and marketing expenses: commissions to travel intermediaries, expenses for marketing program and materials, bank fees for processing bank card payments, and compensation and benefits for sales and marketing personnel. Pre-opening expenses: Rental fees, personnel costs, and others. Operational Data
(in thousands) Operational Data 2007 (RMB) 2008 (RMB) 2009 (RMB) (US$)

Revenues: Leased and operated hotels Franchised and managed hotels Total Revenues Less: Business tax and related tax Net Revenues EBITDA

248,199 1,210 249,409 (14,103) 235,306 (95,983)

797,815 12,039 809,854 (45,605) 764,249 (67,957)

1,288,898 44,965 1,333,863 (73,672) 1,260,191 214,893

188,825 6,587 195,412 (10,793) 184,619 31,482

EBITDA stands for earnings before interest, taxes, depreciation, and amortization. It is used as a proxy for how much cashflows the company generates, without the impact of accounting principles or capital structure of the company.

Operating Costs and Expenses Hotel operating costs Selling and marketing expense General and administrative Pre-opening expenses Total operating cost Income/loss from operation Income(loss) before income taxes Net income

(228,362) (17,581) (65,653) (61,020) (372,616) (137,310) (131,001) (113,739)

(687,364) (40,810) (81,665) (108,062) (917,901) (153,652) (156,463) (132,583)

(1,004,472) (57,818) (83,666) (37,821) (1,183,777) 76,414 69,438 51,448

(147,156) (8,470) (12,257) (5,541) (173,424) 11,195 10,173 7,537

Hotel operating costs Rents and utilities Personnel costs Depreciation and amortization Consumables, food and beverage Others Total hotel operating costs

(112,787) (34,411) (33,234) (35,597) (12,333) (228,362)

(322,809) (137,231) (92,838) (82,662) (51,824) (687,364)

(508,579) (169,248) (141,600) (119,056) (65,989) (1,004,472)

(74,507) (24,795) (20,744) (17,442) (9,668) (147,156)

Revenue Growth Leased and operated hotels Franchised and managed hotels Total Revenue Growth Costs Margins (out of Total Revenues) Business tax and related tax Hotel operating costs Selling and marketing expense General and administrative expense Pre-opening expenses Total operating cost

221.4% 895.0% 324.7% 5.7% 91.6% 7.0% 26.3% 24.5% 149.4% 5.6% 84.9% 5.0% 10.1% 13.3% 113.3%

61.6% 273.5% 164.7% 5.5% 75.3% 4.3% 6.3% 2.8% 88.7% 5.5% 75.3% 4.3% 6.3% 2.8% 88.7%

Hotel operating costs makes up the majority of expenses. By year 3, the company has reached operational efficiency and pushed down operating margins to only 75%, from 91% on year 1.
Occupancy rate Leased and operated hotels Franchised and managed hotels Total hotels in operation Average daily room rate (RMB) Leased and operated hotels Franchised and managed hotels Total hotels in operation RevPAR (room revenue/nights available)

85% 82% 85% 181 176 181

89% 74% 87% 178 180 178

94% 91% 94% 174 172 174

Leased and operated hotels Franchised and managed hotels Total hotels in operation

154 145 154

158 132 156

165 156 163

Operational Data Total hotels in operation Leased and operated hotels Franchised and managed hotels Total hotel rooms in operation Leased and operated hotels Franchised and managed hotels Average rooms per hotel Leased and operated hotels Franchised and managed hotels Number of cities

67 62 5 8,089 7,583 506 122 101 23

167 145 22 21,033 18,414 2,619 127 119 35

236 173 63 28,360 21,658 6,702 125 106 39

Home Inns & Hotel Management (HMIN)

http://sec.gov/Archives/edgar/data/1376972/000119312508115377/d424b3.htm

195 leased an operated hotels and 78 in development; 71 franchised and 37 under development. Cayman Island corporation. Risks: 1) Changes in economic conditions 2) Natural disasters or travelers fear of contagious diseases 3) Competition from other hotels Unlike 4 or 5 star hotels, its not expensive to start a new hotel 4) Local market conditions. Over supply of or reduction in demand of rooms 5) Employee performance Risks in hiring and maintaining qualified employees. 6) Increase in operating costs because of inflation Leasing Under PRC law, all lease agreements are required to be registered with the local housing bureau. The annual rent for each hotel ranges from RMB0.6 million (US$.08million) to RMB 5.2million (US$0.7 million), depending on the location, size, and condition of each property. Each lease ranges from 8-20 years, most of which are in 15 years. Hotel Development Identify potential new markets and perform a comprehensive study of each new market by visiting the site and gathering background information, such as regional economic conditions and availability of existing hotel services in the prospective new market. Then they select the ideal hotel locations in the chosen market. Once the site is selected, negotiate with the property owner while conducting diligence on legal and regulatory aspects, including owners land title and zoning regulations. They lease properties from

real estate owners and convert the property to hotels. Before completion of construction, they carry out pre-opening activities such as appointing the general manager and hiring and training new staff members. It typically takes 4 to 6 months from execution of a lease to hotel opening. Capital expenditures include investments in furniture, fixture and equipment, technology. Market criteria Economic growth: Cities with business activities measured by employment opportunities, population growth rates, tourism and convention activities, air traffic volume, commercial real estate occupancy and retail sales volume. Identified 100 cities in china, including cities with population over 4 million, annual GDP over RMB80 billion. Favorable development environment: minimal zoning requirements and absence of lengthy local development approval and registration process. As well as availability of suitable sites and construction contractors. Specific hotel Criteria Location and Market Appeal: location near business and leisure centers that generate broad demand. Drivers include transportation hubs, convention centers, business parks, shopping centers and retail areas, major highways, tourist spots, major universities and culture and entertainment centers. Size and facilities: hotels with 80 150 guest rooms.

Financing Information
Financing Activities BTG BTG BTG Total Borrowed 2005 BTG China Merchants Bank China Merchants Bank China Merchants Bank China Merchants Bank Total Borrowed 2006 Date of loan 7/15/2005 9/7/2005 10/18/2005 Maturity date 7/14/2008 9/6/2008 10/17/2007 Years 3.00 3.00 2.00 Principal (RMB) 20,000,000 10,000,000 10,000,000 40,000,000 20,000,000 40,000,000 6,000,000 20,000,000 20,000,000 106,000,000 Principal (US) 2,501,783 1,250,891 1,250,891 5,003,565 2,501,783 5,003,565 750,535 2,501,783 2,501,783 13,259,449 Rate 6.2% 6.2% 6.2%

1/11/2006 4/29/2006 5/30/2006 8/21/2006 9/11/2006

1/10/2008 10/28/2006 11/29/2006 2/20/2007 3/10/2007

2.00 0.50 0.50 0.50 0.49

6.2% 5.4% 5.4% 5.6% 5.0%

Development financed by bank loans. Proceeds from IPO used to pay off debt as well as further company expansion.
(in thousands) Operational Data Revenues Leased and operated hotels

2004 (RMB) 93,687

2005 (RMB) 279,948

2006 (RMB) 243,492

(US$) 30,458

Franchised and managed hotels Total Revenues Less: Business tax and surchages Net Revenues Operating costs and expenses Rents and utilities Personnel costs Depreciation and amortization Consumables, food and beverage Others Total leased and operated hotel costs Sales and marketing expenses General and administrative expense Total operating cost and expenses Income from operations

2,313 96,000 (5,101) 90,899 (30,703) (12,949) (5,681) (6,441) (8,162) (63,936) (2,113) (15,983) (82,032) 8,867

5,913 285,861 (16,830) 269,031 (94,784) (41,225) (23,335) (20,765) (26,100) (206,209) (7,691) (24,535) (238,435) 30,596

5,567 249,059 (13,344) 235,715 (73,976) (36,502) (19,730) (17,811) (23,022) (171,041) (3,898) (20,898) (195,837) 39,878

696 31,154 (1,669) 29,485 (9,254) (4,566) (2,468) (2,228) (2,880) (21,396) (488) (2,613) (24,497) 4,988

Revenue growth Leased and operated hotels Franchised and managed hotels Total Revenues Cost margins (out of total revenues) Rents and utilities Personnel costs Depreciation and amortization Consumables, food and beverage Others Total leased and operated hotel costs Sales and marketing expenses General and administrative expense

198.8% 155.6% 197.8% 32.0% 13.5% 5.9% 6.7% 8.5% 66.6% 2.2% 16.6% 33.2% 14.4% 8.2% 7.3% 9.1% 72.1% 2.7% 8.6%

-13.0% -5.9% -12.9% 29.7% 14.7% 7.9% 7.2% 9.2% 68.7% 1.6% 8.4% 29.7% 14.7% 7.9% 7.2% 9.2% 68.7% 1.6% 8.4%

Revenues declined for the year 2007. Also seems their operating margins are significantly less at 68.7%.
Operational data Total hotels in operation Leased and operated hotels Franchised and managed hotels Total rooms Geographic coverage Number of cities

18 8 2,991 8

54 14 8,197 22

63 19 9,707 26

Occupancy rate Average daily rate RevPar

86.8% 191 166

89.8% 182 163

93.8% 181 170