Home Inns: A Long/Short Play on China

These numbers make Home Inns a perfect proxy for a play on China. For those taking a bullish view, 10 times is a bargain for this type of forecasted growth. On the other hand, taking a bearish view, 30 times is sky high for a stock which may return to historical revenue patterns if the economy and markets don't continue to boom.

So I've constructed two investment cases: one for those bullish on China's domestic economy and markets; one for those bearish. Remember too that Home Inns is a marginable, shortable stock with both calls and puts available.

The long case for Home Inns: bullish on China's domestic economy and markets; the country is back on track; the economy is strong and will continue to produce jobs and income. The stock and property markets will continue to appreciate, providing disposable wealth which can be spent on travel and entertainment. Home Inns' aggressive expansion will put it at the forefront of the China discount hotel chain market allowing it to capture a huge amount of increasing expenditure from the world's largest population. Costs are relatively containable and margins are seemingly expandable, so a continuing boom in China will go straight to the company's bottom line.

The short case: bearish on China's domestic economy and markets; China's overall economy, particularly the stock and property markets, is on a stimulus money sugar high. Consumers will continue to spend cheap money and spend stock and property market winnings as long as they last, but once the stimulus ends the discretionary spending, such as travel, will be the first to be cut. Home Inns already will have over-expanded into a market which is attracting massive inflows of foreign competition, such as Holiday Inn and Days Inn, and will suffer from significant overcapacity. Net losses will be inevitable.

So although there are no long/short domestic China ETFs, there are still ways for investors to take a long or short view, levered or unlevered.

-- Written by Rick Pearson in Beijing.