What is the news?

Visitor arrivals was subdued. 1Q15 tourist numbers dipped 6.1% y-o-y.  For perspective, 2014 visitor arrivals declined 3.0% y-o-y from 2013. The decline in 2014 was the first full year decline since 2009.

Hotel three key metrics of AOR, ARR and RevPAR  were  lower as well.  Dampened by absence of biennial Singapore Airshow and less demand for corporate bookings.

Chinese  tourists  are  choosing  Thailand, South Korea,  Japan and  USA  over Singapore. Easing of visa  rules, strengthening of CNY and  geographical proximity were contributing factors.

Outlook for the sector

Currency headwind  of relatively strong  SGD  will be the  overriding factor.  Weakened regional  currencies  that  have  depreciated  against  SGD  would  deter  visitors  from choosing Singapore as a destination.

Singapore  visitor arrivals  not likely to meet upper range  of STB's estimate  of 3%.  On the  back  of  a  6.1%  y-o-y  dip  in  visitor  arrivals  in  1Q15,  the  remaining  three  quarters would  have  to  each  grow  by  more  than  6.1%  in  order  to  achieve  the  upper  range  of STB's full year estimate.

Average Room Rate (ARR) facing pressure.  Combination of weak visitor numbers and upcoming supply of hotel rooms  would continue to put pressure on  AOR and  ARR, and consequently RevPAR.

Continued growth  of  outbound Chinese tourists.  Facilitated by relaxation in visa  rules and longer re-entry terms by various countries to woo Chinese visitors. Strengthening of CNY results in higher purchasing power of the Chinese tourist and encourages outbound traffic.

Key risk to  the sector is  the spread of  MERS  across the region.  19  fatalities reported in South Korea so far.

Investment Ideas

All things equal, pure-play Singapore Hospitality REITs expected to underperform their Hospitality-peers  with  geographically  diversified  portfolios.  (Barring  DPU-accretive acquisitions  and  asset  enhancement  initiatives.)  The  two  pure-play  Singapore Hospitality REITs are OUE Hospitality Trust and Far East Hospitality Trust.

Favour  Retail  REITs  with  presence  in  heartland  malls  over  those  reliant  on  Tourist Receipts  from Shopping.  Frasers  Centrepoint  Trust  (Accumulate:  Target  Price: S$2.14, Last close: S$2.08)

Exposure to growth in outbound Chinese  tourists.  Beijing  Capital International Airport, HK: 694 (Accumulate, Target Price: HK$9.23, Last close: HK$8.73).

Cautious  over  lacklustre  Singapore  visitor  arrivals,  undermined  by  strong  SGD.  SATS Ltd (Reduce, Target Price: S$2.97, Last close: S$3.48).

Source: Phillip Securities Research - 18 Jun 2015