Singapore Strategy - UOB Kay Hian 2016-04-22: Profit From Recovering Tourist Arrivals

Singapore Strategy - UOB Kay Hian 2016-04-22: Profit From Recovering Tourist Arrivals Singapore Strategy SINGAPORE AIRLINES LTD C6L.SI SATS LTD S58.SI CDL HOSPITALITY TRUSTS J85.SI

Singapore Strategy - Profit From Recovering Tourist Arrivals 

  • We assess the potential impact of a recovery in tourist arrivals and highlight our key tactical picks ahead of the upcoming results reporting season. 
  • Key winners include SIA, SATS and CD REIT. 


 Solid growth momentum in tourist arrivals. 

  • The latest Feb 16 tourist arrivals indicate that the growth momentum remains intact, with February tourist arrivals rising 11.9% yoy after a 12.7% yoy rise in January 

 Recovery in traditional markets. 

  • Growth in tourist arrivals from key markets such as Indonesia, China and India also enjoyed a strong recovery, particularly China, from which tourist arrivals rebounded 33.6% yoy (Jan-Feb). Indonesian tourists continued to flock back to Singapore since Jan 16 after 17 consecutive months of a decline. 
  • Despite the strong start to 2016, the Singapore Tourism Board (STB) maintains it conservative 0-3% growth forecast for tourist arrivals in 2016. This compares to our forecast of 5% yoy growth for 2016. 


 Supportive monetary policy. 

  • In our view, the recent surprise policy move by the MAS to adopt a neutral appreciation for the S$ policy could also provide a fillip to tourist arrivals as this could make Singapore a more affordable tourist destination. 
  • On a ytd basis, the S$ has appreciated 0.2-5.5% against currencies of key tourists markets such as Indonesia, China and India. The exception would be Malaysia, where the ringgit firmed 4.9% vs the S$, helped by the recent recovery in oil prices. 

 Watch out for upcoming results. 

  • The recovery in tourist arrivals could benefit sectors such as hospitality, airline, aviation services, medical tourism, retail and discretionary consumption. 
  • In our view, some sectors will benefit more than the others. 

 Tactical positioning in airlines/aviation services ahead of upcoming results. 

  • Among the various sector beneficiaries, we believe investors should consider airlines and aviation services as the most direct play on rising tourist arrivals. 
  • In addition to tourist arrivals, airlines could also benefit from lower oil prices as previous expensive hedges expire. 
  • Our key picks include SIA (BUY/Target: S$13.90) and SATS (BUY/Target: S$4.50)
  • SATS, SIA Engineering (SIAEC) and SIA are likely to report a good set of earnings as a result of increased visitor arrivals/flights handled at Changi. Both SATS and SIAEC are duopolies. SATS has about a 80% share of all meals and flight handled at Changi, while SIA Engineering has about a 78% share of line maintenance at Changi. The incremental volume should lead to improved margins at both firms in 1Q16. We estimate a 36% and 34% rise in 4QFY16's (calendar 1Q16) operating profit for SATS and SIAEC respectively. 
  • SIA's earnings, however, will be more impacted by pax yields and fuel cost. Still, load factors were stronger for all airlines within the SIA group for calender quarter of 1Q16. 

 Hospitality S-REIT remains preferred property play on this theme. 

  • Within the various segments in S-REITs, we favour the hospitality segment. 
  • We see the potential for average daily rate (ADR) expansion in 2017 in view of recovering tourist arrivals, resilient occupancy as well as tapering of hotel room supply growth in 2017. 
  • Our top pick in the hospitality sector include CD REIT and ART but the former is the preferred proxy for Singapore pick-up in tourist arrivals. CD REIT is a key beneficiary, as 71% of its assets are in Singapore (by value). Watch out for stablisation in RevPAR on back of high occupancy levels driven by strong visitor arrival growth in the upcoming CD REIT results on 29 April. 

 Limited uplift for medical tourism. 

  • As for medical tourism beneficiaries, these include Raffles Medical Group and IHH Healthcare. However, we see limited impact on these two healthcare companies. 
  • For RMG, about one-third of its hospital segment revenue is derived from foreign patients and we estimate about 10-15% of its patients are from Indonesia. While the recovery in tourists bodes well, we see limited impact on RMG as its foreign patients are from over 100 countries. Given that it focuses on curative treatments. this suggests relative inelasticity to a weaker Singapore dollar, unless there are extreme movements. 

 Closer to fair value after the recent bounce. 

  • After the recent bounce, we have turned more cautious as the FSSTI’s discounted valuations (to long-term mean) have narrowed but earnings visibility remains weak. 
  • The FSSTI’s FY16F PE of 14.9x is only at a 3% discount to long-term mean PE valuation of 15.4x. Therefore, we would take the recent bounce as an opportunity to selectively sell on strength. 
  • Key SELLs include SMM, Starhub, SIA Engineering and Super Group. 
  • Stocks that we favour include OCBC, SingTel, City Dev, SingPost, CD REIT and Bumitama. 
  • Investors with an appetite for mid caps could consider Valuetronics and Cityneon. 


Andrew Chow CFA UOB Kay Hian | Singapore Research Team UOB Kay Hian | http://research.uobkayhian.com/ 2016-04-22