CDLHT will continue to be a beneficiary of the blossoming tourism industry

Fair Value S$2.00


Visitor arrivals on track
Visitor arrivals maintained strong growth of 13.4% YoY in Jan 2012 to reach 1.2m. In that month, arrivals from the three largest countries of origin, namely Indonesia, China and Malaysia, saw solid increases. These countries accounted for 40% of all visitor arrivals last year. Notably, arrivals from China spiked up 52.8% YoY to 201.7k in Jan. While some of the increase could be attributed to Chinese New Year falling in Jan instead of Feb this year, we note that the Jan-12 China number is 34.5% higher than the Feb-11 figure.

High-end hotels outperform in RevPAR, occupancy
According to the STB, average RevPAR for Singapore hotels increased 11.7% YoY to S$209 in Jan. On a RevPAR basis, high-end hotels outperformed budget hotels. The Luxury and Upscale tiers increased by 9.1% and 14.3% respectively while Mid-tier and Economy hotels saw declines of 6.4% and 3.6%. These results support our preference for the high-end hotel sector. The decline in RevPAR for budget hotels comes not from declining average room rates, which actually increased, but from reduced occupancy (down 7 ppt). Many of the visitors from developing countries are not budget travelers.

CDLHT has good positioning

As mentioned previously, we project that the supply of high-end hotel rooms will increase by 3.0% p.a. for 2012-2015 while budget hotel rooms will increase by 5.6% p.a. We estimate that hotel demand will grow by 6.4% p.a., outstripping total hotel room supply growth of 3.8% p.a. On another related note, CBRE has projected that RevPAR for Singapore hotels will increase by 5%-8% in 2012. Given this, our RevPAR growth projection for CDLHT Singapore’s hotels of 5.5% in 2012 is not aggressive.

Maintain BUY
We maintain our BUY rating and our S$2.00 fair value estimate based on a RNAV analysis. With the majority of its revenue coming from high-end Singapore hotels, CDLHT will continue to be a beneficiary of the blossoming tourism industry.

Visitor arrivals on track.
Following an impressive 13.2% YoY increase in visitor arrivals in 2011, visitor arrivals jumped again by 13.4% in Jan 2012 to reach 1.2m. The tourism industry still looks on track to hit the 17m visitor arrivals target for 2015 set by the Singapore Tourism Board (STB) (see Exhibit 1). That target implies a 6.6% p.a. increase for 2012- 2015 and a target of 14.0m for 2012. We believe that a 14.0m visitor arrivals figure is feasible. Arrivals from the three key markets of Indonesia, China and Malaysia, which together accounted for 40.4% of all arrivals in 2012, showed substantial YoY increases in Jan.

It is not just the Chinese New Year effect. Arrivals from mainland China and HK increased 52.8% YoY and 33.0% YoY to 201.7k and 39.0k respectively. The magnitude of these jumps could be partly attributed to Chinese New Year falling in Jan instead of Feb this year. Controlling for the effect of the Chinese New Year holiday season, the increase for mainland China is still very impressive, with Jan-12 arrivals 34.5% more than Feb-11 arrivals.

Indian arrivals down. We are mildly concerned about the 9.2% YoY decline in Jan visitor arrivals from India. The weakening of the rupee was probably a significant factor, with the currency falling up to ~16% against the Singapore dollar between Jan 2011 and Jan 2012. According to a Straits Times article on 13 Mar 2012, debt woes for Indian airlines have caused air fares to rise by 10-15% in the last two months, with analysts projecting further increases. Indian visitor arrivals accounted for only 6.6% of the total in 2011, so growth from the other three major Asian contributors should more than compensate for YoY declines in the following months, if any.

High-end hotels outperform budget. According to the STB, average Revenue Per Available Room (RevPAR) for Singapore hotels increased 11.7% YoY to S$209 in Jan. On a RevPAR basis, high-end hotels outperformed budget hotels. The Luxury and Upscale tiers increased by 9.1% and 14.3% respectively while Mid-tier and Economy hotels saw declines of 6.4% and 3.6%. These results support our preference for the high-end hotel sector. We note that the decline in RevPAR for budget hotels comes not from declining average room rates, which actually increased, but from reduced occupancy (down 7 ppt).

The STB groups hotels into tiers based on a combination of factors such as average room rates, location and product characteristics. The four tiers used are as follows:
Luxury - Includes hotels in the luxury segment and are predominantly in prime locations and/or in historical buildings.
Upscale - Includes hotels in the upscale segment and are generally in prime locations or hotels with boutique positioning in prime or distinctive locations.
Mid-Tier - Includes hotels in the mid-tier segment and are primarily located in prime commercial zones or immediately outlying areas.
Economy - Includes hotels in the budget segment and are generally located in outlying areas.

The exact list of hotels that comprise each tier is not publically available.

As a rule of thumb, we estimate that Upscale and Luxury hotels correspond to hotels that are 4-star and above. CDLHT’s six hotels in Singapore would fall under the Upscale or Luxury tiers. Orchard Hotel and Grand Copthorne Waterfront are 5-star while M Hotel, Copthorne King’s Hotel, Novotel Clarke Quay and Studio M Hotel are 4-star.

Our in-house database classifies hotels that are 4-star and above as high-end; budget refers to all other hotels. Hence, hotels that we classify as high-end would roughly correspond to the Luxury and Upscale tiers from STB, while budget hotels would correspond to Mid-tier and Economy.

As mentioned previously, we project that the supply of high-end hotel rooms will increase by 3.0% p.a. for 2012-2015 while budget hotel rooms will increase by 5.6% p.a. High-end hotels face better supply-side dynamics than budget hotels over the next few years (see Exhibits 5 and 6).

They are not just budget travelers. The fact that developing Asian countries were responsible for much of the increase in arrivals while occupancy for budget hotels actually decreased is an indication that many of these travelers are able and willing to spend reasonable amounts on accommodation. The latest STB data showing detailed breakdown of spending by country of residence is for 2009 (see Exhibit 7). Surprisingly, the average spend per visitor from developing Asia was 4.6% higher than other countries for which tourism receipts were provided. The average spending by a tourist from mainland China was very encouraging at S$1.5k, ~17% above the overall average of S$1.3k.

Studying the breakdown of tourism receipts by category, we observe that the average tourist is spending increasingly more on accommodation, with the 2011 spend of S$327 at 5% above the 2010 figure, which was itself 8% more than 2009’s. In a sense, the “quality” of tourists has been improving.

BUY CDLHT – high-end hotels show strength. We maintain our BUY rating and fair value estimate of S$2.00 based on an RNAV analysis. Visitor arrivals data for Jan is very encouraging at 13.4% above last year. The better performance shown by high-end hotels in occupancy and RevPAR supports our thesis that the high-end sub-sector is to be preferred. On the supply side, high-end hotels face more limited supply coming onboard in the next few years. On the demand side, while visitor arrival growth is chiefly from developing Asia, the average tourist has been moving away from being a “budget traveler”.