• Proxy to China hospitality recovery
• FY18F EBITDA expected to grow 16%
• Initiate with FV of HK$21.05

Luxury Hotel Player With Large Exposure to Mainland China

Shangri-La Asia (69 HK, “Shangri-La”) is primarily a hotel ownership and management company, with assets consisting mainly of fivestar deluxe city centre and resort hotels based largely in Asia Pacific countries. In particular, Shangri-La’s mainland Chinese hotel assets contributed 49% of the group’s hotel EBITDA and 31% of the group’s EBITDA across all segments in FY17.

Given the group’s substantial exposure to mainland Chinese hospitality as well as a high degree of operational leverage, we see ShangriLa as a proxy to what we expect to be a multiyear recovery in the Chinese luxury hotel industry.

You’ve Only Seen the Beginning of the Ascent

RevPAR recovery in China started in 1Q17 after several years of decline. From channel checks and data points, it appears that the growth of luxury hotel room supply in Tier 1 and 2 cities has been slowing down while the domestic tourist spend has continued its relentless pace of growth.

Feeding the growth of local demand for luxury hotel rooms in China are three key factors:

1. high-spending millennials
2. legislation and
3. massive infrastructure developments within the country which are discussed in greater detail in the sector report.

The hospitality industry typically works in cycles, given the 3-5 years needed to develop new hotels. We believe that the current demand-supply situation is ripe for several years of RevPAR recovery.

Initiate With a FV of HK$21.05

We initiate coverage on Shangri-La Asia (69 HK) with a BUY rating and a fair value estimate of HK$21.05. This is derived through a sum-of-theparts (SOTP) valuation that consists of applying a 15.3x EV/EBITDA ratio (15% premium to Asian hotel companies peer average) for Shangri-La’s hotel business as well as applying a 30% discount to its investment properties.

We believe Shangri-La deserves a premium given its strong international branding as well as its exposure to the RevPAR recovery story in China.

Investors also stand to benefit from internal cost-cutting and efficiency measures that are expected to bring up to US$80m in savings as well as opportunities to strengthen revenue growth in the next 3-5 years.

Source: OCBC Research - 18 Jun 2018