• Keep NEUTRAL and SGD1.25 TP, 5% upside. Recent official data points to a steady pick-up in Singapore visitor arrivals, and 2024 looks promising with a line-up of major concerts and air shows. However, we expect the return of high-spending Chinese tourists to remain weak, and see a slow recovery in corporate travel. CDL Hospitality Trusts also faces challenges from rising interest costs and FX impact. Current valuations are fair, in our view, with the stock trading at 0.8x book value and offering 6% yields.

• 1H23 visitor arrivals of 6.3m was at 67% of pre-pandemic levels, equivalent to 2022’s full-year numbers. Singapore’s visitor arrivals were propelled by key markets of Indonesia (18%), India (11%), and Malaysia (8%). Hotel revenue per available room (RevPAR; average 5M23) surged 21% above pre-COVID-19 (5M19) levels, driven by a strong increase in room rates (32%) from continued pent-up demand – especially in the high- end segment of the market. Overall, we expect full-year Singapore RevPAR to come in 15-20% above pre-pandemic levels and flatten out next year. This will remain the key driver of CDLHT’s NPI, with two-thirds of its portfolio positioned on the mid-tier to upscale segment of the Singapore market.

• Singapore hotel valuation has room for upside. The recent sale of Park Royal Kitchener Hotel at a 24% premium to its latest valuation indicates continued investor interest in the Singapore hospitality market. The sale, in our view, will likely result in positive valuation rerating for upscale hotels, benefitting the REIT’s Singapore assets. CDLHT’s gearing is modest at 37.5% as at 1Q23, but is expected to rise by 1-2ppts with the ongoing progressive payments for UK build-to-rent developments and asset enhancements in Singapore. Management is also on the lookout for acquisition opportunities, mostly in overseas markets such as UK and Japan, and sees more opportunities from over-leveraged buyers.

• Three reasons we are cautious on CDLHT: i) Chinese visitors to Singapore – the bulk of pre-pandemic visitors, or one-fifth of the total – have seen a slow recovery, at 7% of the total in 1H23, with June marking the first month since Jan 2020 to cross the 100k threshold. We expect Chinese visitor recovery to remain patchy and see a return to pre-pandemic levels only by 2025, in addition to rising inflationary pressures and dissipation of pent-up demand posing challenges for visitor arrivals, ii) CDLHT has among the lowest debt hedges among SREIT’s at c.56% and has nearly half of its debt maturing in 2023-2024. Therefore, rising interest costs will continue to weigh on earnings, and iii) performance at its overseas markets has been mixed and we expect the rising SGD to weigh on overseas earnings.

• No changes to estimates. We applied a 2% ESG premium to our DDM- derived TP, based on CDLHT’s 3.2 ESG score (above the country median).

Source: RHB Research - 12 Jul 2023