RHB Securities 2015-08-17: OUE Hospitality Trust - 2Q15; Stormy Weather Ahead. Downgrade to SELL.

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OUE HOSPITALITY TRUST SK7.SI

Stormy Weather Ahead 

• We downgrade our recommendation on OUEHT to SELL, with a DDM-derived TP of SGD0.78 (implied return: -12.4%), as we are alerted by the further weakness within the hospitality sector. 
• The unfavourable supply-demand dynamics has worsened in view of a devaluation of the Chinese Yuan, which will probably result in a decline in Chinese arrivals. 
• Bear in mind that tourist arrivals has fallen 4.1% YTD, mainly due to a drastic 13.6% YTD fall in Indonesian arrivals. 
• With the above factors, we are expecting RevPAR to decline further. 

 2Q/1H15 results at lower end of our forecasts. 

• OUE Hospitality Trust (OUEHT) posted a 7.3%/5.7% YoY decline in 2Q/1H15 DPU to SGD1.52/3.13 cents, accounting for a mere 47.0% of our full year estimates. 
• The additional master lease income contribution from the newly acquired Crowne Plaza Changi Airport Hotel (CPCA) on Jan15 could not offset the weaker operating performance at Mandarin Orchard Singapore (MOS). 
• MOS RevPar fell a whopping 9.9% YoY to SGD218 due to the headwinds faced within the tourism sector. 

 More storm to come among hoteliers. 

• In our CDL Hospitality Trust report, we have already highlighted that the unexpected 7.7% increase in hotel room supply this year (initially: 5.0%) would provide further pressure on hoteliers to further cut room rates. 
• To add salt to the wound, China has devalued its currency few days back, which we believe would result in a drastic fall in Chinese tourist arrivals (Jan to May: + 3.1%). 
• Factoring these, we are expecting RevPar to slide further as hoteliers may no longer enjoy an occupancy level of over 80% simply due to the reduced number of tourist arrivals. 

 Downgrade to SELL and a TP of SGD0.78. 

• In view of a weaker supply-demand dynamics due to 
  1. the devaluation of the Chinese currency and 
  2. unexpected large supply of hotel rooms this year, 
  we have trimmed our FY15/FY16 DPU by 9.0%/7.6% to SGD6.05 and 6.78 cents respectively. 
• We derived a target price of SGD0.78 (previously SGD0.98) based on a DDM-methodology, implying a potential downside return of 12.4%.

Ivan Looi Ong Kian Lin | http://www.rhbgroub.com/ RHB Securities 2015-08-17

SELL Downgrade HOLD 0.78 Down 0.98