CDL H-Trust – OCBC

Industry remained challenging in July

• Huge supply growth for mid-tier hotels
  
• QE tapering fears still affecting yield plays
  
• Maintain HOLD
  

Had been hoping for a better July

In our 19 Aug Hospitality report we stated that industry contacts indicated that July and August may have been showing RevPAR growth on a YoY basis for the industry as whole. However, disappointing data for the sector in July has just been published on September 1. Based on STB figures, we estimate that RevPAR fell 8% YoY for July. We think certain players are continuing to perform significantly better than their peers within each category, and 3Q13 for the sector as a whole could well show a contraction like in 1H13.

Challenging environment continues

We believe that hotel room supply will expand at 6.5% p.a. over 2013-2015 while hotel room demand will grow at only 5.8% p.a. Apart from the usual uplift in even numbered years like 2014 from more MICE events, this supply-demand imbalance will put pressure on real RevPAR growth. CDLHT’s hotels in Singapore are best classified as being in the Mid-tier/Upscale categories. It is worth highlighting that we anticipate a huge growth of 10.9% p.a. in mid-tier room supply, which means that CDLHT’s Singapore hotels could face significant RevPAR pressure over the medium-term. Recall that the 2Q13 RevPAR for CDLHT’s Singapore hotels fell 8.5% YoY to S$193. They were affected by increased competition, weaker corporate demand and the absence of a biennial event in April.

Yield plays hit by inevitable QE tapering

Concern over the timing of QE tapering by the US Federal Reserve and its impact on interest rate and bond yields continues to weigh on the performance of the Asian markets and yield plays like CDLHT since May.

Cut FV to S$1.56

Previously using an RNAV model, we have transitioned to a DDM model. Incorporating a risk-free rate of 2.7% (versus 2.5% previously) into our model, our FV drops to S$1.56 from S$1.73. We maintain a HOLD rating on CDLHT.