Hospitality REITs Singapore - UOB Kay Hian 2016-10-05: Golden Week, Likely Meek

Hospitality REITs Singapore - UOB Kay Hian 2016-10-05: Golden Week, Likely Meek Singapore REIT CDL HOSPITALITY TRUSTS J85.SI  FRASERS HOSPITALITY TRUST ACV.SI  ASCOTT RESIDENCE TRUST A68U.SI 

Hospitality REITs Singapore - Golden Week, Likely Meek

  • Amid the global hubbub surrounding the commencement of China’s National Day Golden Week, Singapore hoteliers may have less to cheer for. The average length of stay for Chinese visitors, Singapore’s largest source market, has deteriorated rapidly since 2014. This coincides with the sharp increase in cross-border (Malaysia-Singapore) travel. 
  • We prefer geographically-diversified hospitality stocks (ART, FHT) over Singapore-centric ones (CDREIT). 
  • Maintain OVERWEIGHT.



WHAT’S NEW


China’s National Day Golden Week kicks off. 

  • The week-long holiday has commenced at the start of this week, with the China Travel Academy and online travel agency CTRIP expecting 589m outbound travellers to spend a collective US$70b.
  • CTRIP, China’s largest online travel agency (35.6% market share according to China internet Watch) has ranked Singapore the ninth most popular destination during this period.

Don’t hold your breath though

  • Don’t hold your breath though as the average length of stay (ALOS) for Chinese visitors has declined 34% since 2014’s peak of 4.4 days, with overall ALOS down 6.7%. This might well be explained by increased Chinese land travel to Singapore from Malaysia, (up 122.2% yoy in 7M16), propelling overall Chinese arrival growth (up 49.2% yoy in 7M16). 
  • The proportion of Chinese land travel to Singapore has risen from a low of 15.7% in 2014 to ytd high of 25.2% in 7M16 (it last peaked in 2012).

Chinese travel to Singapore weaker in October than during Chinese New Year. 

  • We opine that hoteliers in Singapore might have another reason to be less sanguine in October as the National Day Golden Week generally sees weaker Chinese arrivals than during the Chinese New Year’s Golden Week. This trend has prevailed even before 2014’s aviation tragedies and China’s revision of domestic tourist policies in Oct 13. In contrast, top Chinese destinations like South Korea, Japan and Thailand generally see more Chinese arrivals during the October Golden Week.

Influx of Chinese tourists with tighter purse strings of little comfort to hoteliers. 

  • In Singapore, Chinese per capita expenditure on hotels fell 5% yoy to S$211 in 1Q16 (-40% from 2014's peak of S$352), which could help explain the increased cross-border travel, with nearby Johor Bahru likely appealing to tour groups which have more restricted spending plans. This could stem from the higher inflow of tourists from China’s secondary cities, encouraged by the STB’s concerted efforts to catalyse travel through platforms like Alipay. 
  • Our channel checks suggest these visitors came in tour groups and are usually budget-conscious on accommodation. Singapore hospitality REITs also largely do not cater to such tour groups as they operate in the mid- and upper-tier segments.

Supply indigestion unlikely to be allayed yet on back-end loaded supply. 

  • Some 1,925 rooms, which account for 67.2% of 2016F supply (2,866 rooms), are slated to hit the Singapore market. The mid-tier and upscale/luxury (both segments account for 82.5% of 2H16 estimated supply of 1,925 rooms, according to consultant Horwath HTL.
  • For the year, the mid-tier (49%) and the upscale/luxury (29%) segments will account for 78% of room inventory. This may also partially explain the softer industry RevPar in 7M16 (-2.3% yoy) as the sector continues to grapple with supply indigestion.


ACTION


Maintain tourist growth expectation of 5% yoy in 2016 despite resilient growth in 7M16 (up 11.5% yoy). 

  • The recent outbreak of the Zika virus and recent weakness in Changi throughput prompt us to remain cautious on 2H16 arrivals. The Zika outbreak has already prompted top inbound markets - Australia and South Korea - to issue travel advisories, in addition to rotational interest in the UK on a weaker sterling. However, we reckon the healthy line-up of events later this year, such as the Singapore International Water Week and Unicity Global Convention, could still underpin corporate travel. 
  • While industry room rates are down 3%, we have already factored in a 10% decline in CDREIT’s 2016 room rates due to ongoing renovations, and 5-10% decline in ART’s and FHT’s Singapore room rates over the year.

We prefer geographically-diversified hospitality plays, given supply-side headwinds for Singapore hoteliers. 

  • Maintain HOLD on CDL Hospitality as we believe the supply digestion combined with the disruptive effects of renovations (at CDREIT's Grand Copthorne and M Hotel) may only see operating performance (RevPAR, ADR) improve in 2H16. 
  • Maintain BUY on Ascott Residence Trust and Frasers Hospitality Trust, which are laggard plays in the hospitality segment while offering diversification benefits.


SECTOR CATALYSTS

  • Pick-up in room rates.


KEY RISKS

  • A stronger Singapore dollar.
  • Unanticipated new supply of hotels.



PEER COMPARISON






Derek Chang UOB Kay Hian | Vikrant Pandey UOB Kay Hian | http://research.uobkayhian.com/ 2016-10-05
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 1.37 Same 1.37
BUY Maintain BUY 0.81 Same 0.81
HOLD Maintain HOLD 1.55 Same 1.55



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