Singapore Hospitality REITs - UOB Kay Hian 2017-04-19: New Hope For Hoteliers

Singapore Tourism Board Singapore Hospitality Sector Tourism Industry Conference FRASERS HOSPITALITY TRUST ACV.SI CDL HOSPITALITY TRUSTS J85.SI

Singapore Hospitality REITs - New Hope For Hoteliers

At its Tourism Industry Conference 2017, the Singapore Tourism Board announced fresh initiatives to bolster tourism, including collaborating with Walt Disney (Star Wars theme in 2017) and rejuvenating Orchard Road.
While these augur well for hoteliers, near-term headwinds such as supply indigestion and tepid corporate demand still persist.
We prefer geographically-diversified Frasers Hospitality Trust over Singapore-centric CDL Hospitality Trust.

We attended the Singapore Tourism Board’s (STB) Tourism Industry Conference 2017 last week, where Minister of Trade and Industry S Iswaran announced a slew of new initiatives:
1. A 3-year collaboration with Walt Disney to inject vibrancy in Singapore through experiential attractions. Star Wars, Marvel as well as Disney themes will play out respectively in 2017-19. 2017 will see a Star Wars festival on 4 May, followed by a slew of similarly themed events in 2H17.
2. Revitalising Orchard Road. Short-term plans include the closure of a road lane to widen pedestrian space, a “scramble walk” a la Tokyo’s Shibuya Crossing, as well as tapping upon existing state land to facilitate street performances and the incorporation of a design incubator. The possibility of the complete pedestrianising of Orchard Road in the long term was also touched upon.
3. Usage of technology and Big Data. With help from a local telco, STB was able to discern accommodation preferences across different markets. They found that visitors from India, South Korea and the Philippines are most likely to switch hotels. South Koreans tend to round up their trip by ‘upgrading’ to a higher-tier hotel, with many choosing to stay at the integrated resorts.

On Monday, STB renewed its partnership with Changi Airport Group and Singapore Airlines, with the attraction of MICE travellers a key focus for this 3-year S$33.8m joint collaboration.
Beyond the domestic shores, the STB also intends to participate in key MICE tradeshows and platforms in the US and Europe.

Growth from India (+17.3% yoy), Australia (+15.4% yoy) and Japan (+10.7% yoy) was partially offset by declines in Singapore's largest inbound markets such as China (-3.2% yoy), Indonesia (-3.4% yoy) and Malaysia (-1.0% yoy).

This was likely due to seasonality as Chinese New Year holidays were in February in 2016 but started earlier this year in January. For 2M17, Chinese arrivals actually rose 15.5% yoy.
Overall RevPAR dipped 0.3% yoy in Feb 17, dragged down by upscale hotels (-1.4% yoy to S$237.0) and mid-tier hotels (-1.1% yoy to S$148.6).
Economy hotels did well (+10.4% yoy to S$80.6) in Feb 17, with luxury hotels also observing positive RevPAR (+0.8% yoy to S$419.8).

While domestic hoteliers are likely to warmly receive the fresh initiatives by the STB, we note that the hospitality sector continues to be plagued by a confluence of excess supply and tepid corporate demand. While fully pedestrianising Orchard Road is an admittedly ambitious step, the longer-term nature of the project does not address the immediate concerns of domestic hoteliers.
In Feb 17, average room rates fell 4.7% yoy to S$236.7 despite average occupancy rising 4ppt yoy to 89.3%, causing overall RevPAR to dip 0.3% yoy. This suggests that hoteliers could still be dropping room rates to boost occupancy.

Likely indigestion pangs from the supply glut, with about 3,767 rooms slated to come on stream in 2017, representing a 5.9% increase over 2016’s supply.
The mid-tier (41% of total) and upscale/luxury (46% of overall) segments’ room supply would account for about 87% of total room supply in 2017, according to consultant Horwath HTL.
While supply is expected to trickle to a meagre 69 rooms (+0.1%) in 2018, this is premised on hotel completions being on schedule (historical tendency of being deferred, resulting in backend loaded hotel room supply).

Little respite on demand-side this year, with a more tepid events calendar (lacking biennial events like the Singapore Airshow and Food & Hotel Asia) while corporate demand (oil & gas, banking & finance) is likely to remain lacklustre in 2017.
Our channel checks with domestic hoteliers indicate an increasing proportion of leisure clientele in room uptake, with the corporate and leisure mix now more evenly split.

We retain our 2017 and 2018 tourist arrival estimates of 16.4m (+0.4% yoy) and 17.0m (+3.0% yoy) respectively.
Our 2017 tourist arrival growth estimate of 0.4% yoy is well within the STB's forecast growth of 0-2%. We prefer to stay conservative on our growth projection, given 2017's more tepid events calendar and 2016's higher tourist base (arrivals at all-time high).
Our hospitality pick is Frasers Hospitality Trust for its more geographically diversified portfolio (Singapore accounts for 37% of asset value).
Maintain HOLD on CDL Hospitality (Singapore accounts for 69% of asset value) as we believe that the unenviable combination of supply digestion and waning corporate demand may only see the operating performance (RevPAR, ADR) of its Singapore portfolio improve in 2018.

Vikrant Pandey UOB Kay Hian | Derek Chang UOB Kay Hian | http://research.uobkayhian.com/ 2017-04-19

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.740 Same 0.740

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