CDL H-Trust – OCBC

DEVELOPMENT CHARGE HIKE FAVORS INCUMBENTS

•Rise in DC greatest for hotels

•Possible pipeline from CDL unaffected

•Buoyant hotel demand

Biggest DC hikes for hotels

The development charge (DC) rates announced on last week saw an average increase of 15% for Hotels. We think this is worth mentioning as the next largest average increase was only 6% (Commercial), all other groups saw no changes, except for the 3% decrease for nonlanded Residential. The DC rate hike rates could have incremental impact on future hotel supply by increasing development costs. As an incumbent with 2.7k rooms in six high-end hotels in Singapore, including Orchard Hotel and Grand Copthorne Waterfront, CDLHT has an edge over potential entrants. The significant DC increase has marginally driven up the replacement cost of hotel rooms and thus would have a positive valuation effect on hotels and also on CDLHT.

Possible pipeline from parent CDL

As we have identified in our previous report, there are three hotels being developed by City Developments Ltd (CDL) which CDLHT could consider acquiring. These hotels should be opening over 2012 to 2015 and are not subject to the new DC increases. Through this, CDLHT has some cost advantage over other hotel companies which do not have a developer parent or associate that has already gotten provisional permission for the development of new hotels.

Hotel demand will outstrip supply

We are positive on the long-term prospects of the hospitality sector and believe that this year will set a new visitor arrival record over last year’s stellar 13.2m (up 13%). We project that hotel room demand will grow at 6.4% p.a. for 2012-2015, easily outpacing an estimated increase in hotel rooms of 3.8% p.a. In terms of supply dynamics, high-end hotels (4-star and above) are well-placed with an estimated increase of only 3.0% p.a. over the same period.

Maintain BUY

We maintain our BUY rating and our S$2.00 fair value estimate based on a Revalued Net Asset Value (RNAV) analysis. As a liquid counter with an existing supply of high-end hotels, and a developer parent with a potential pipeline unaffected by the new DC hike, CDLHT is well-placed to benefit from the still-growing tourism industry.