SG Hospitality - OCBC Investment 2019-01-16: Quick 4Q18 Preview – Cautiously Optimistic

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OUE HOSPITALITY TRUST (SGX:SK7) FAR EAST HOSPITALITY TRUST (SGX:Q5T) ASCOTT RESIDENCE TRUST (SGX:A68U)

SG Hospitality - Quick 4Q18 Preview – Cautiously Optimistic

• Mixed RevPAR performance in Oct, Nov.
• Watching the Chinese economy.
• Maintain Overweight.

RevPAR recap: Strong Oct, Weak Nov

• According to Singapore Tourism Board figures, industry-wide RevPAR increased +7.3% y-o-y in Oct 2018 but only +3.0% y-o-y in Nov 2018 (Dec figures are not yet out). In particular, Upscale hotels posted y-o-y RevPAR growth of +8.2% in Oct and -1.9% in Nov, while Mid-Tier hotels posted +2.9% y-o-y in Oct and -1.2% in Nov.
• The strong Oct numbers were no surprise – during their 3Q18 results announcement, CDL HOSPITALITY TRUSTS (SGX:J85) disclosed that their SG hotels clocked a stellar +7.2% RevPAR growth for the first 29 days of Oct.
• We note that Mid-Tier hotels no longer seem to be outperforming the Upscale hotels – consequently, SG assets owned by REITs under our coverage may show more coordinated operational performance between the two tiers.

Demand: Is the leisure growth outlook still intact?

• Visitor arrivals grew at a healthy clip for most of 2018, growing +7.2% y-o-y for the Jan-Oct 2018 period, but faltered towards the end of the year with a +0.6% y-o-y growth rate in Nov. In particular, Chinese visitor arrivals dropped 12.4% y-o-y in Nov after posting +8.3% y-o-y growth for Jan-Oct 2018.
• China remains the largest contributor to visitor arrivals into Singapore (3.2m for Jan-Nov 2018, vs. 2.7m from Indonesia for the same period). There have been some signs of economic distress in China – we saw the Caixin/Markit Manufacturing PMI fall below 50 in Dec, the first time in 19 months – but 2019’s outlook still depends heavily on the rapid shifts in trade tensions.
• Should there be no concrete resolution to the trade war by March, we see the possibility that a dampened consumer confidence may result in a fall in outbound traffic from China. We continue to monitor the situation and will update our readers accordingly.

Supply: One year later…

• Recall that there was a significant injection of hotel room supply at the end of 2017 – 7 new hotels opened during 4Q17. These include Andaz Singapore, Novotel and Mercure Singapore on Stevens, and the Courtyard by Marriott at Novena.
• One year on, we do believe that Singapore’s hospitality industry as a whole has been given ample time to absorb the supply injection. Furthermore, we have received feedback that many of these hotels have displayed room rate discipline (i.e. did not cut rates too aggressively), which reduces downward pressure on ADRs for other nearby hotels.
• While some hotels may continue to be affected if the new supply is located in their vicinity (e.g. Bugis or Orchard), we continue to see 2019 as a good year for hospitality given the dramatically reduced pace of supply injection. At current stock prices, we see value in some of the hospitality REITs under our coverage.

Maintain Overweight on SG Hospitality

• Looking at hospitality REITs under our coverage, we have BUYs on
  • OUE HOSPITALITY TRUST (SGX:SK7) [Fair Value: S$0.79],
  • FAR EAST HOSPITALITY TRUST (SGX:Q5T) [Fair Value: S$0.675], and
  • ASCOTT RESIDENCE TRUST (SGX:A68U) [Fair Value: S$1.18].
• Maintain OVERWEIGHT on Singapore Hospitality.

Deborah Ong OCBC Investment Research | https://www.iocbc.com/ 2019-01-16

SGX Stock Analyst Report BUY MAINTAIN BUY 0.790 SAME 0.790

BUY MAINTAIN BUY 0.675 SAME 0.675

BUY MAINTAIN BUY 1.180 SAME 1.180