• It’s been a long, cold, lonely winter
• Turning a corner in SG and in CN
• Initiate on Shangri-La Asia [69 HK]

Singapore: It’s Going to Get Hotter Through the Year

Hotel RevPARs are currently ~20% down from their peak in 2012, having been affected by stiff competition from new hotels despite climbing visitor arrivals. Going forward, given that much of last year’s supply injection was back-end loaded, we expect hotel RevPARs to accelerate from the pace seen in 1Q18.

Visitor arrival growth has had a healthy start with visitor days growing +1.2% YoY in Jan, +7.1% in Feb, and +8.6% in Mar. On the other hand, hotel room supply is only expected to increase +2.5% in 2018, +0.8% in 2019, and +0.6% in 2020.

China: More Than a Temporary Heat Wave

Singapore is, however, not only place where we see a demand-supply situation ripe for RevPAR growth. RevPAR growth in mainland China turned positive in 1Q17 after several years of decline, and we believe the recovery is still in its early stages, particularly for luxury hotels.

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.

Given the current demand-supply situation, we believe existing hotel owners/operators are poised to benefit from several years of RevPAR recovery.

Initiate BUY on Shangri-La Asia

We initiate coverage on Shangri-La Asia [BUY; FV: HK$21.05], an Asia-based hotel ownership and management company, with a portfolio consisting mainly of five-star deluxe city centre hotels and resorts. With the group’s substantial exposure to mainland Chinese hospitality as well as a high degree of operational leverage, we see Shangri-La as a proxy to what we expect to be a multi-year recovery in the Chinese luxury hotel industry.

On the other hand, for hospitality SREITs, while we see 2018 as a positive year operationally, we remain wary on the impact of rate hikes on REITs as an asset class. Out of the hospitality S-REITs, we like Far East Hospitality Trust [BUY; FV: S$0.735] as we believe that the operational upside has yet to be priced in. We are also positive on Hotel Properties Limited [BUY; FV: S$4.74] given its attractive valuations.

We have a POSITIVE view on the regional hospitality sector.

Source: OCBC Research - 18 Jun 2018