• 1H18 PATMI up 148% YoY!
• Prospects remain bright
• Re-iterate BUY

Interim Results Beat!

Shangri-La Asia’s (69 HK, “Shangri-La”) 1H18 results were solid with PATMI increasing 147.8% YoY to US$152.9m or 67.2% of our initial fullyear forecast. 1H18 PATMI also came to 65.9% of the street consensus estimate of US$232.0m.

1H18 revenue increased 18.8% YoY to US$1.2b or 49.8% of our full-year forecast, while EBITDA increased 22.2% to US$301.5m. The 78% YoY increase in share of profit of associates took us by surprise, with 1H18 numbers making up 69% of our initial full-year forecast.

Weighted average Revenue Per Available Room (RevPAR) grew by 14% YoY, supported by a 12% increase in China which was in turn led by a 9% increment in Average Daily Rates (ADR). RevPAR in Hong Kong increased 14% YoY.

Worries of RMB Weakening and RevPAR Slowdown Overblown

Since our initiation, the counter has fallen 28% before closing at HK$11.80 on 24 Aug. We believe this share price weakness has been due to worries over a sharp slowdown in RevPAR growth in China in USD terms due to trade war uncertainties and RMB weakening.

According to Smith Travel Research, China’s July RevPAR growth came to 0.8% YoY (USD terms). We believe these fears have been overblown. With this set of results, should 2H18 be a mere repeat of 2H17, full-year PATMI would be 10% higher than our initial FY18 forecasts.

While we believe China’s RevPAR growth will moderate downwards given 2H17’s high base, we expect the favorable demand-supply situation to persist for the next two to three years.

During the latest round of earnings, peers IHG and Marriot commented that current trading conditions in China remain robust and there appears to be little indication that the trade situation has impacted performance.

Property Sales Recognition to be the Sweetener on Top in 2H18

Shangri-La expects to recognize profits from the sale of residences in its Colombo development in the second half. As of Jul, ~72% of the development’s GFA has been sold and the group expects to hand over at least 50% of the sold units before year-end. Should this come to pass, the Group will record a net share of profit of US$60m (v. US$11.9m in 1H18).

We continue to view Shangri-La as a proxy to a multi-year recovery in the mainland Chinese luxury hotel industry and see value at current price levels.

After lowering our premium to peer EV/EBITDA to 10% given dampened investor sentiment, our SOTP fair value dips slightly from HK$21.05 to HK$20.00. Maintain BUY.

Source: OCBC Research - 27 Aug 2018