China’s lodging industry has expanded rapidly as a result of the substantial growth of the Chinese economy and travel industry over the past several years. According to Euromonitor, the total number of room-nights in China grew from 811 million in 1999 to 1.2 billion in 2004 and total sales grew from RMB190 billion in 1999 to RMB264 billion in 2004.

The lodging industry in China consists of hotels as well as other forms of accommodation such as guesthouses and privately-owned lodging outlets. Although hotels accounted for only approximately 2.5% and 5.0% of total lodging outlets in China in 1999 and 2004, respectively, the hotel sector represents an increasingly significant portion of the lodging market, accounting for approximately 44.5% and 60.2% of total sales in the lodging market in 1999 and 2004, respectively, according to Euromonitor.

Historically, hotel development projects in China generally focused on star-rated hotels that were primarily targeted at international tourists and corporate travelers. In recent years, economy hotel chains have emerged and expanded in China, gaining a growing customer base consisting primarily of individual domestic business and leisure travelers. Since 2004, the growth of branded economy hotel chains in China has accelerated, as evidenced by the existing chains’ rapid expansion into new urban business centers in other regions of China.

According to the 2006 Economy Hotel Report, the top three economy hotel chains in China, namely, Jinjiang Star, Home Inns and Motel 168, had market shares of 20%, 18% and 10%, respectively, of the Chinese economy hotel market in 2005. Competition among economy hotel chains in China is primarily based on a hotel chain’s ability to provide a consistent product, high-quality services, an efficient reservation system and effective sales channels, as well as specific product features including the design, decoration and guest amenities of the hotels within the chain.

A typical Company’s hotel has 80 to 150 guest rooms. Each hotel has a standardized design, appearance, decor, color scheme, lighting scheme and set of guest amenities in each room, including a bedding package featuring mattresses meeting the standards of four-star hotels in China, free in-room broadband Internet access, a comfortable work space, air-conditioning and a supply of cold and hot drinking water. Home Inns hotels are strategically located to provide the guests with convenient access to major business districts, ground transportation hubs, major highways, shopping centers, industrial development zones, colleges and universities, and/or large residential neighborhood.

For its leased-and-operated hotels, the Company leases properties from real estate owners or lessors and it is responsible for hotel development and customization, as well as repairs and maintenance and operating expenses of properties over the term of the lease. The Company is also responsible for all aspects of hotel operations and management, including hiring, training and supervising the managers and employees required to operate its hotels and purchasing supplies. The Company typically pays fixed rent on a quarterly basis for the first three or five years of the lease term, after which it may be subject to a 3% to 5% increase every three to five years. The terms of the Company’s leases range from eight to 20 years, most of which are 15 years.

For its franchised-and-managed hotels, the Company franchise its Home Inn brand to franchisees who are property owners, lessors or existing hotel operators, and it is generally responsible for managing these hotels, typically including the hiring and appointing of the general managers of these hotels. Under a typical franchise agreement, the franchisee is generally required to pay the Company an initial franchise fee of RMB0.2 million (US$0.03 million) to RMB0.3 million (US$0.04 million), annual franchise fees of 3% of the revenues of the hotel, as well as an annual management fee of 3% of the revenues of the hotel. The franchisee is responsible for the costs of hotel development and customization to conform to the standards of Home Inns, as well as for repairs and maintenance and operating expenses of the hotel. The typical term for the Company’s franchise agreements is five years.

Total operating costs and expenses increased substantially from RMB91.8 million for the six months ended June 30, 2005 to RMB195.8 million (US$24.5 million) for the six months ended June 30, 2006.

Income from operations increased by 266.1% from RMB10.9 million for the six months ended June 30, 2005 to RMB39.9 million (US$5.0 million) for the six months ended June 30, 2006.

Net income was RMB27.2 million (US$3.4 million) for the six months ended June 30, 2006, an increase of 227.7% from net income of RMB8.3 million for the six months ended June 30, 2005.