SG Hospitality Sector

Muted outlook for 1H13

● More stores to come
● Price competition won't return
● Fair value raised; maintain BUY

Cautious about 1H13
We note that after an outstanding 1Q12, with RevPAR and visitor arrivals growing YoY by 14% and 14.7%, respectively, growth in RevPAR and visitor arrivals decelerated through 2Q12 and 3Q12. Our channel check indicates that hotel bookings up to Chinese New Year in 2013 are still weak, with limited visibility beyond that. We note that 2013, an odd-numbered year, will likely see fewer MICE events, as biennial events are generally held in even-numbered years. Hoteliers have also expressed concern over the upcoming competition that will result from the growth in hotel room supply; new hotels typically provide substantial room rate discounts in the first few months of operation. With no immediate catalysts in sight, and an uncertain global economic environment, we see a muted outlook for tourism in 1H13.

Continued growth expected over 2012- 2014
For 2012-2014, we forecast that hotel demand will grow at
6.4% p.a., outstripping the projected 4.8% p.a. increase in room supply. Supporting the positive longer-term outlook, the top four places of origin for Singapore’s visitor arrivals are projected to have real GDP growth rates of at least 4.8% in 2013 (Indonesia +6.3%, China +8.1%, Malaysia +4.8% and India +6.6% for FY ending Mar 2014).

Supply situation is manageable, and better for high-end hotels
Breaking down the projected growth in hotel room supply for 2012-2014, we note that the lower the tier, the higher the expected supply growth: Luxury (+1.6% p.a.), Upscale (+3.4% p.a.), Mid-tier (+7.0% p.a.) and Economy (+7.2% p.a.). For the first 10 months of 2012, higher hotel tiers showed stronger YoY growth in Average Room Rate (ARR) and RevPAR than lower tiers. We think that this is attributable to the more favourable supply and demand dynamics for the Luxury and Upscale tiers. The number of affluent visitors to Singapore is increasing with the general growth in arrivals, and supply is more stable for the higher-end hotel tiers.

Downgrade to NEUTRAL We are downgrading the hospitality sector from Overweight to NEUTRAL. Our top pick is Ascott Residence Trust [BUY, FV: S$1.37], due its favourable exposure to the global growth regions of the serviced residence industry – Europe and developing Asia. We also have a BUY rating on Global Premium Hotels [BUY, FV: S$0.29], and HOLD ratings on CDL Hospitality Trusts [HOLD, FV: S$1.91], Far East Hospitality Trust [HOLD, FV: S$1.02] and Genting Singapore [HOLD, FV: S$1.33].