Here at StreetAuthority, we don't talk about Chinese stocks very much. They've proven too risky, and more than a few have blown up in the face of major accounting scandals. In short, the risk usually seems to outweigh the reward when it comes to investing in the world's fastest-growing major economy.
Yet I've been watching one stock, quarter after quarter, and I'm now increasingly convinced that it's not just another Chinese house of cards waiting to topple over. It has solid auditors that have been in place for quite some time, has been steadily growing for many years, and just as important, is now quite inexpensive.
I'm talking about 7 Days Group (NYSE: SVN), which is one of the leading hotel brands in mainland China. Chinese tourism has exploded during the past five years, and this company has the numbers to prove it. And though Chinese domestic tourism is booming, it's still in the early innings. Consider that there are currently 0.5 hotel rooms per 1,000 people in China, compared with 2.5 rooms per citizen in the United States.
The industry is led by Home Inns & Hotels Management (Nasdaq: HMIN) with roughly 16% market share. 7 Days is the second-largest player with 9%, and Jin Jiang Hotels, China Lodging (Nasdaq: HTHT) and Motai round out the top five. The industry is heavily concentrated in the Beijing and Shanghai regions, and further expansion is expected to come from major cities in the country's interior. 7 Days has rapidly expanded during the past five years, and now owns, leases or manages 2,000 hotels in roughly 150 cities.
7 Days focuses on the economy end of the lodging market, catering to Chinese consumers that have only recently entered the middle class and are just beginning to travel, primarily to domestic destinations. It's also become an increasingly popular choice for other travelers as the Chinese economy has slowed.
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"Business and leisure travelers with increasingly tight budgets have switched out from 3- and 4-star hotels. This makes the [economy segment] particularly more attractive than the general lodging industry," note analysts at Brean Murray.
7 Days differentiates itself by seeking out locations close to –- but not inside -- the prime real estate of a particular city. That lowers development and operating costs, enabling it to pursue aggressive pricing. It also spends less than others on advertising or travel agents, instead capturing consumers through its website, which is the leading hotel site in China.
The company's growth has mirrored the expansion of the Chinese tourism sector, as sales grew from $40 million in 2007 to more than $300 million in 2011. Yet, as that sales base expands, robust growth will be harder to achieve. Analysts expect sales to grow 30% in 2012 to above $400 million, and less than 25% in 2013 to just above $500 million. That slowing growth may be what scared off investors. Shares have fallen from the low $20s in early 2011 to around $8.50.