Friday, 13 December 2013

Hospitality Sector

OCBC on 12 Dec 2013

The dreariness that characterized the Singapore hospitality industry over 2013 looks set to continue into 1Q14 with the subdued global business sentiment, a strong Singapore dollar and increasing competition with an expanding supply of hotels. Our channel checks indicate that hotel bookings up to Feb 2014 are still weak, despite an expected pickup to the number of MICE events for 2014. We project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. Given this, the industry is facing a mild oversupply situation. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector and do not see any significant growth catalysts in the short-term. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

What ails thee…
2013 has not been an easy year for Singapore hoteliers, with revenue per available room (RevPAR) for 10M13 falling by 1.1%. While the decline does not look significant, note that the figures may have been skewed upwards by the continued strong performance of the IRs’ hotels (e.g. MBS experienced RevPAR growth of ~10% for 9M13), which account for ~8% of the total stock. CDL Hospitality Trusts’ Singapore hotels experienced a RevPAR decline of 7.7% for 9M13 and FEHT’s Singapore hotels have been missing their IPO revenue forecasts. Key reasons for the challenging hospitality environment include: 1) growing hotel room supply, 2) a strong SGD relative to most regional currencies and 3) negative business sentiment, especially regionally, leading to smaller travel budgets. 

Oversupply situation for 2013-2015
The Singapore Sports Hub is scheduled to open in Apr 2014, and a marquee event on its calendar will be the Women’s Tennis Association Championships to be held yearly in Oct from 2014 to 2018. We forecast that events held at the Sports Hub could add around 2% to hotel room bookings on a stabilized annual basis, e.g. after 1-2 years of gestation, by pulling in ~310k visitor arrivals. However, this would be just to support the growth in room demand that we are anticipating. Specifically, we project that for end-2012 to end-2015, hotel room demand will grow at a CAGR of 5.4%, while hotel room supply will expand at a CAGR of 6.5%. This mild oversupply situation will continue to place pressure on RevPAR. 

Substantial supply growth for Mid-tier hotels
For 2013, we expect the growth in hotel room supply to be 5.8% YoY. For 2014, YoY growth is expected to be even higher at 7.1%. Breaking down the projected growth in hotel room supply for end-2012 to end-2015, we note that the 52% of the new room supply is from the Mid-tier: Economy (+3.6% p.a.), Mid-tier (+10.9% p.a.) and Luxury and Upscale (+4.7% p.a.). Note that CDLHT and FEHT have substantial exposure to Mid-tier/Upscale hotels and Global Premium is mainly an Economy-tier play.

Maintaining NEUTRAL for 2014
While 2014 should see more MICE events YoY given that biennial events are generally held in even-numbered years, our industry sources indicate that hotel bookings up to Feb 2013 are still soft, with limited visibility beyond that. With no significant catalysts in sight over the short-term, we continue to anticipate a weak outlook for Singapore tourism in 2014. We project that 2014 RevPAR growth for the industry will be in the low single-digit percentages at best, and do not rule out another year of contraction. We are maintaining our NEUTRAL rating on the Singapore hospitality sector. Our top pick is Global Premium Hotels [BUY, FV: S$0.33]. The 1H14 opening of its second mid-tier hotel, Parc Sovereign Tyrwhitt, could boost GPH’s net income by ~17% in 2014.

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