Hospitality Trusts

CIMB Research, June 23

RECENT data from the Singapore Tourism Board (STB) revealed that visitor arrivals to Singapore remained flat y-o-y in Q1-14. During this period, higher visitor arrivals from South-east Asia (+4.1 per cent y-o-y), on the back of stronger arrivals from Indonesia (+5.5 per cent y-o-y), was offset by weaker visitor arrivals from China (-14.0 per cent y-o-y).

On the other hand, it was noted that RevPAR (revenue per available room) for Singapore hotels during the first four months rose by 2.1 y-o-y, despite a 0.7 per cent y-o-y drop in occupancy.

The growth was attributed to the upscale and luxury hotel segments, where RevPAR expanded by 10.1 per cent and 3.1 per cent y-o-y, respectively, versus -4.4 per cent in the mid-tier and +0.2 per cent in economy segments.

The slowdown in visitor arrivals from China could mainly be attributed to (1) the new tourism law in China which took effect last October, and, (2) (but to a lesser extent) the MH370 incident.

For February and March, Chinese visitor arrivals dropped by an average of 19.5 per cent y-o-y. During this period, although fewer Chinese came on multi-country package tours, more travelled here on their own. This group of visitors tend to spend more. As highlighted by data released by STB earlier this year, total Chinese tourism receipts in Q4-13 grew by one per cent despite their numbers dipping by 31 per cent over the same period.

During 2013, Chinese spending was also noted to reach about S$3.0 billion, exceeding the Indonesians (at S$2.3 billion) for the first time since 2007. Furthermore, tourism shopping tax refund company Global Blue recently pointed out that Singapore remains the second most favoured shopping destination for the Chinese after Paris.

This trend is expected to strengthen as the government aims to position Singapore as a top luxury lifestyle destination through various partnerships with Chinese tourism providers.

Other than the patronage from big Chinese spenders, the upscale and luxury hotel segments are expected to benefit from (1) stronger Indonesian visitor arrivals, (2) packed calendar of events in 2014, and (3) a potentially stronger corporate spending trend as the global economy continues to recover in 2014.

With the luxury and upscale hotel segments' RevPARs expected to be strong in 2H14, we maintain our "Add" rating on OUE-HT (TP: S$0.96) as the company has the ability to boost RevPAR through the sponsor-funded AEI (asset enhancement initiatives) of its Mandarin Orchard hotel.

Similarly, we remain positive on CDL-HT (Add; TP: S$1.97) and expect continual good performance from its Singapore and Maldives portfolios.

On the other hand, we are negative on Far East Hospitality Trust (Reduce; TP: S$0.80) as we expect its portfolio of mid-tier hotels, particularly those located along Orchard Road, to come under pressure amid intensifying competition in the coming months.

Sector: OVERWEIGHT