Shangri-La Asia - DBS Research 2020-11-18: China Hotels To Drive Recovery


Shangri-La Asia - China Hotels To Drive Recovery

  • COVID-19 continues to exert pressure on hotel business.
  • Shangri-La Asia's Hotel performance in China bottomed in Feb, recovery led by hotels in Tier 2-4 cities.
  • Conserving cash with stringent cost controls.

Shangri-La Asia Investor Conference Call Takeaways

Q: Can you update us on occupancy and room rate in each region?

  • Currently, Shangri-La Asia's hotels outside of China continue to suffer from the effects of COVID-19 with < 30% occupancy. Hotels in China are staging a good recovery with occupancy rising from a low of 2.6% in Feb and reaching c.49% in July and c.60% in Aug.
  • Within China, Tier-1 cities are underperforming as they tend to rely on international travel and corporate demand. Hotels in Tier-2 to Tier-4 cities are relatively more resilient as they are driven more by leisure guests. Room rates are not meaningful to discuss at this stage as the company is offering significant discounts in response to the pandemic.
  • At current occupancy rates, the company is a price-taker. Shangri-La Asia needs occupancy to recover to c.70-75% to regain bargaining power.

Q: What are the key observations on guest mix?

  • Domestic leisure travel in China is the most significant demand driver. Leisure travelers are more price sensitive compared to business travelers, hence it is difficult for Shangri-La to increase its room rates at this stage. Leisure travelers also tend to book their rooms with a lot less lead time compared to business travelers.
  • Demand from leisure guests is also more fragile as they are more prone to cancellations should outbreaks recur. A recovery of hotel performance to pre-pandemic levels would require business travel to resume.

Q: Can you comment on how Shangri-La manages cash usage each month?

  • Shangri-La Asia's hotel business in China has reached EBITDA break-even in June and July. Cash flow should be positive from Aug to Oct which should help alleviate the overall cash burn. Regions outside of China continue to face a challenging operating environment.

Q: When is the next largest debt maturity?

  • Total debt of c.US$1.08bn is due in 2022. Shangri-La Asia is working with banks to refinance this loan and plans to finalise this by the end of 2020. Banks remain supportive of Shangri-La Asia although pricing will be understandably higher, and the loan tenor will be shorter than expected.

Q: Can you give us more colour on staycations?

  • Staycations help boost occupancy but room rates for these packages remain low due to promotions. Staycation is not a sustainable strategy as it is challenging to convince local residents to stay in a hotel in their own city. Full recovery of the hotel business will require international travel to resume.

Q: Is Shangri-La taking this opportunity to refurbish old properties and what is the CAPEX budget?

  • Shangri-La Asia is currently prioritising cash conservation. Large scale CAPEX is not consistent with this goal, and thus this has been suspended. However, the company is continuing with CAPEX projects that it has committed to pre-pandemic albeit at a smaller scale.

Q: Can you give us more colour on cost control measures?

  • Shangri-La Asia has been able to cut operating expenses by c.50%. Most of the cuts were achieved by requiring staff to take no-pay leave and suspending services from contractors. Room related variable costs such as utilities also decreased as occupancy remain subdued.
  • Further cuts would require redundancies, but Shangri-La Asia is striving to keep as many of its staff as possible.

Q: Please comment on breakeven levels of occupancy.

  • Prior to the pandemic, the EBITDA breakeven level of occupancy was c.40-50%. Due to significant cost cutting, Shangri-La Asia currently needs c.35-39% occupancy to achieve EBITDA breakeven. Should the pandemic subside, operating expenses would also need to increase in line with demand, hence breakeven levels of occupancy would increase back to 40-50%.

Q: Please comment on the effect of US$ fluctuation on the balance sheet.

Ian CHUI CFA DBS Group Research | https://www.dbsvickers.com/ 2020-11-18
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