REITs – CIMB

Engines started

The Singapore Tourism Board (STB) recently released the Jul 2014 visitor arrival and hotel RevPAR data. Although the numbers did not appear exciting at first glance, the mom growth figures in Jul 2014 were the strongest in the last five years. This trend was in line with our expectations of a stronger tourism/hospitality sector in 2H14 and could mark its turnaround. We maintain our sector Overweight rating, with CDL-HT and OUE-HT as our top picks in the hospitality REITs sector.

What Happened

STB's recently published Jul 2014 tourism numbers showed that tourist arrivals dipped 0.9% yoy, while hotel RevPAR was flattish in 7M14.

What We Think

Although visitor arrivals in Jul 2014 were weaker than in Jul 2013, they were stronger than in Jun 2014. Although Jul is a seasonally strong month for tourism, we think it noteworthy that visitor arrivals rose 19.2% mom in Jul 2014 compared to the historical average of 13.5% (since 2010). Similarly, Chinese and Indonesian tourist arrival rates rose 97.4% and 6.7% mom in Jul 2014, respectively, above the historical average of 65.5% and -1.7%, respectively. Although this growth could partly be due to the low base from 1H14, we think that it marks a turnaround in the tourism sector, thanks to the easing political tension in Thailand and slight recovery from the negative impact of the MH370 disappearance earlier this year. The recovery is supported by the gradual recovery in Chinese visitor arrivals growth in Singapore during the past two months (vs. arrival rates in Jun-Jul 2013) from the trough of -51.7% yoy in May 2014. In Jul, we note that hotel occupancy growth of 5.1% mom was the strongest in the past five years, despite the flattish yoy hotel RevPAR. Among the various classes of hotels, luxury and upscale hotels continued to deliver strong performances, posting RevPAR gains of 11.2% and 2.8% yoy, respectively. Economy hotels posted a surprisingly strong RevPAR increase of 7.5% yoy. As highlighted in our previous report titled 'Impending turnaround', we continue to believe that Singapore's hospitality market will deliver stronger performance in 2H14 than 1H14, barring any unforeseen circumstances. Our view is based on the following positive factors: 1) the stabilisation of the Indonesian Rupiah, 2) delays in the delivery of several hotel projects, which will halve the estimated new supply of hotel rooms in FY14, 3) the slightly stronger tourist arrivals in 2H14 (+2.8% hoh, based on our estimates), and 4) the stronger corporate spending expectations in 2H14.

What You Should Do

We believe that CDL-HT (Add, TP:S$1.88) and OUE-HT (Add, TP: S$0.96), which are REITs with upscale hotels in their Singapore portfolio, will be prime key beneficiaries of the anticipated recovery in the hospitality sector in 2H14. Currently, CDL-HT is trading at 1.0x FY14 P/BV, with 6.5% FY14 dividend yield and 7.1% FY15 dividend yield, while OUE-HT trades at 1.0x FY14 P/BV, with 7.8% FY14 dividend yield and 8.0% FY15 dividend yield. These valuation levels are undemanding in our view when compared against CDL-HT's trading range of 5-6% yield and 1.4x P/BV in 2010/11.