Hospitality REIT - CGS-CIMB Research 2019-02-28: Impact Of India-Pakistan Crisis

FAR EAST HOSPITALITY TRUST (SGX:Q5T) CDL HOSPITALITY TRUSTS (SGX:J85)

REIT - Hospitality: Impact Of India-Pakistan Crisis

Tensions between India and Pakistan may lead to weaker tourist arrivals from India and Europe.
Far East Hospitality Trust has a slightly higher proportion of guests from India but our analysis shows that the impact is immaterial.
We stay Overweight on REITs while Hospitality REIT remains our second preferred subsector. Longer term RevPAR driver remains intact.

India and Pakistan have been fighting over Kashmir for a long time. However, tensions escalated significantly on 14 Feb 2019 when Pakistan launched a bomb-attack on an Indian army convoy in the Indian-controlled portion of Kashmir. On 26-27 Feb 2018, India conducts air strikes against Pakistan. During the strike, two Indian planes were shot down and one Indian pilot was taken into custody.
This has caused the closure of Pakistani airspace while traffic in India was also restricted from certain airports. Many flights, including those landing in Pakistan and flying over Pakistan airspace between Southeast Asia and Europe, were affected.

The prolonged tensions between Pakistan and India could have a negative impact on tourist arrivals from these two countries. While arrivals from Pakistan are negligible, India is the third largest source of tourists at 7.8% of the total arrivals in 2018.
Pakistan airspace remains closed at the time of writing. The longer airspace closure in Pakistan would also affect arrivals from Europe given that it is one of the major routes between Southeast Asia and Europe. In 2018, European arrivals accounted for 11.1% of the total tourist arrivals.
1Q is generally a non-peak period for Indian tourists, accounting for about 20% of the yearly arrivals over the past four years. On the other hand, 1Q is peak period for European tourists at about 30% of the full year arrivals. However, we believe that the impact on European arrivals will be less given that the closure of airspace will just be temporary.
Moreover, flights between Southeast Asia and Europe could find alternative routes that do not pass through Pakistan airspace.

The potential weaker arrivals from India may affect Far East Hospitality Trust (SGX:Q5T) as Far East Hospitality Trust has a slightly higher proportion of guests from India. CDL Hospitality Trusts (SGX:J85) and OUE Hospitality Trust (SGX:SK7) have less than 10% of their guests coming from India. Based on our sensitivity analysis, a 5% decline in room revenue from Indian guests on a full year basis will reduce Far East Hospitality Trust’s FY19-21 DPU forecast by 0.4%.
Hospitality REIT remains our second preferred subsector after office. We believe the tension will only have a temporary effect on tourist arrivals. The longer-term catalyst for the sector which is the low supply of hotels in the next two years remains intact.
CDL Hospitality Trusts remains our top pick for the subsector.

Rating: ADD, Target Price S$0.68.
Far East Hospitality Trust has slightly higher room revenue generated from Indian guests. Based on our sensitivity analysis, a 5% decline in revenue from Indian guests on a full year basis will reduce Far East Hospitality Trust’s FY19-21 DPU forecast by 0.4% which is immaterial.

Rating: ADD, Target Price S$1.80.
Given that CDL Hospitality Trusts is the bellwether hospitality stock, we believe it will continue to outperform during the cyclical upturn. Hence, it remains our top pick for the subsector.

EING Kar Mei CFA CGS-CIMB Research | LOCK Mun Yee CGS-CIMB Research | https://research.itradecimb.com/ 2019-02-28

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