Yet industry insiders warned that rising property rents might cause problems in this sector.

By the end of 2005, there were 50 economy hotel brands in China operating a combined 600 hotels and 50,000 rooms. The room occupancy rate in the economy hotel sector was 89 percent, ranking first in the whole hotel market.

Domestic hotel chains hold a dominant position over their overseas counterparts in terms of total hotel numbers and market share since their customers are mainly domestic, and brand awareness of local hotel chains among these customers is much higher compared with international ones. Domestic customers make up over 92 percent of clients in budget hotel according to the commission report.

Besides brand awareness, it is easier for the budget hotel chains to rent properties from landlords for use as hotels, which also helped the domestic players expand rapidly.

Home Inn, ranked No. 2 among the top 10 budget hotel chains in China with an 18 percent market share, operates 75 outlets countrywide with 8,967 rooms by the end of 2005. It aims to have 200 hotels by 2008.

Yet since Home Inn's quick expansion is based largely on the fact that they pay rent for most of their properties, the company faces pressure from high rents, said Mao Zhengrong, an analyst from Everbright Securities.

Home Inns, listed on Nasdaq last month, raised US$109 million during its initial public offering. The chain will use US$45 million of the proceeds to build hotels and improve existing properties.

"Home Inn's listing on Nasdaq solved its short-term capital bottleneck caused by high property rental costs," Mao said. "But the company needs to think more about sustainable development in the future, because once the rental period is due, it will face high rentals. This problem might occur in seven to eight years."

Jinjiang Inn is another major domestic economy hotel chain that ranked No. 1 among the top 10 economy hotel chains with 20 percent market share at the end of 2005. It is on track to list in Hong Kong in the middle of this month with other hotel assets affiliated to Jinjiang International Hotels Development, China's largest hotel group.

1

2

(For more biz stories, please visit Industry Updates)