Hospitality – DBS

From Formula One To None

Tourist Arrivals Continue to Drop YoY: October 2008 tourism data extended the continued decline in visitor arrivals, which have been dropping yoy since June 2008. For the month, total tourist arrivals were 843,000, representing an 8.1% fall compared to the year-ago period. This brings 2008 year-to-date arrivals to around 8.4 million. With 2 months of the year remaining, visitor arrivals and spending are expected to fall short of the 2008 targets of 10.8 million and S$15.5bn respectively. If we project the similar c.8% drop yoy in tourist arrivals to November and December numbers, overall arrivals in 2008 will come in at just a touch above 10 million, and would represent the first yoy drop in annual tourist arrival numbers (from 10.3 million in 2007) since the SARS outbreak in 2003.

RevPAR Growth Hits A Roadblock: Average Room Rate (ARR) was estimated at S$241, which is an 8.4% increase over the year-ago period. The Average Occupancy Rate (AOR) for gazetted hotels was estimated at 82% in October, which was a drop of 6.8 percentage points over October 2007. RevPAR grew only by 0.1% yoy to S$199, the first month this year with flat RevPAR growth over the year-ago period.

Cautious on Sector, Banyan Tree TP Reduced: We remain CAUTIOUS on the hospitality sector. We retain our HOLD call on CDL HT (TP S$0.62), with its mid-tier to upscale hotel mix more likely to benefit from business travel downgrades, borne out by the reduction in RevPAR of around c.2% for these two segments in October 2008, compared to a c.9% drop in RevPAR for the luxury segment. We also maintain HOLD on ART (TP S$0.57) with our view that its earnings are likely to be most resilient among the hospitality plays, given longer leases and a likely increase in contract work (over permanent employment) in current uncertain markets. We retain our FULLY VALUED call on Hotel Properties (TP S$0.76), with its slate of local luxury hotels and regional luxury resorts likely to be impacted by the global economic downturn. We also maintain FULLY VALUED on Banyan Tree, and have increased the discount to its SOTP valuation of S$1.23 from 60% to 70% on account of the deteriorating political situation in Thailand, which we believe will impact tourism arrivals for some months to come. Our TP is reduced from S$0.52 to S$0.37.