Spectre of hotel room glut looms

Growth to moderate. The prospect of a slowing economy in China and India, the unfolding of the Eurozone crisis and the US economy’s snail’s-pace recovery will no doubt impact tourism in Singapore. After a record 2011, the Singapore Tourism Board expects 2012 to see a moderation in growth with around SGD23-24b in tourism receipts and 13.5-14.5m in visitor arrivals.

Supply glut looms. We expect 14.2m tourist arrivals in 2012, up 8% from 13.2m in 2011. From 2011 to 2015, we estimate that hotel room supply (measured in terms of available room nights) will grow at 6.3% CAGR, outstripping demand growth of 5.9%. In all, 11,441 new rooms (23.5% of existing stock) from known projects will be added to the market between 2Q12 and 2015. This will push the number of gazetted hotel rooms past the 50,000 mark by 2015. However, so long as occupancy levels exceed 80%, we expect the average room rate (ARR) to hold above SGD245.

ARR to slow to 3.2% pa over 2011-2015. Singapore hotels have, and will continue to benefit from the growth in tourist arrivals, which we project at 5.2% CAGR over 2011-2015F. But the additional supply of hotel rooms will put a damper on occupancy rates, which we estimate will peak at 90% in 2012F before easing to 84% in 2014F. This means that revenue per available room (RevPAR) could hit a new high of SGD233 in 2012F but fall to SGD227-229 in 2013F-2014F and peak again at SGD237 in 2015F.

Maintain HOLD. In our view, the main share price trigger for CDL Hospitality Trusts (CDREIT) is overall ARR growth for the Singapore hotel segment (76% correlation). The group derived more than 80% of revenue from Singapore hotels in FY11, with the region accounting for over 80% of its asset value. We expect Singapore hotels to register 3.2% ARR CAGR over FY11-15F, which should put a cap on CDREIT’s share price. Reiterate HOLD with a DDM-derived target price of SGD1.94. With volatility in the stock markets and more hotel rooms coming on-stream, we would advise investors to stay cautious. At FY12F DPU yield of 6.4%, they would be better off with the more defensive industrial and retail REITs such as Ascendas REIT (~7% yield) and Frasers Centrepoint Trust (~6% yield).

Marching forward

• April tourism data point to a potential record breaking 2Q12 performance for hoteliers

• RevPAR growth momentum continues as hoteliers price room rates higher

• CDL HT (BUY, TP raised to S$2.06) and GENS (S$2.05) offer the best exposure into the industry

Visitor arrivals hit another high in April 12. Latest data from the Singapore Tourism Board (STB) for April12 provides us with a glimpse of how 2Q12 hospitality numbers could turn out. Tourism arrivals in April 12 remained high at 1.2m visitors (+9% y-o-y), a new record. YTD visitor arrivals have hit 4.8m, representing 33% of STB’s higher end target of 13.5-14.5m for 2012. With the industry approaching the seasonally high tourism season of June-July, we are optimistic that the industry could potentially exceed the projections set by STB.

RevPAR hits new high in April, growth momentum picks up. The strong visitor numbers, fueled by major MICE events like Food & Hotel Asia held in April 12, have led to strong demand for rooms, and thus room rates have remained on a firm uptrend on a q-o-q basis. Hotel performance remains robust, with occupancies hovering at a high of c87%. Average room rates at S$261/night, translating to a RevPAR of c.S$227/night, represent a 12% y-o-y jump, surpassing the S$216/night.

We expect hoteliers to report sequentially stronger RevPAR in the coming quarters. Hospitality data should continue to remain robust given the expected strong lineup of MICE events in the coming months (eg.CommunicAsia 2012 to be held from 19-22nd June, F1 race in September12) and the seasonally peak tourist holiday season in June-July. In addition, supply is expected to remain tight, especially in the core city area given the closure of Pan Pacific Singapore (790 rooms, representing close to 1.5% of total room supply in Singapore) for renovations and is expected to re-open only in September12 in time for the Formula one race.

Stock picks. We continue to like CDL Hospitality Trust (BUY, TP raised to S$2.06 as we roll forward numbers to 2013), given its leverage into the robust tourism sector in Singapore. The stock offers FY13-14F yields of close to 6.1 – 6.5%. GENS (BUY, TP S$2.05) should also benefit from expected stronger visitation at Resorts World @ Sentosa during the coming holiday season.

SLOWER GROWTH FOR SINGAPORE HOTELS IN 2Q

•April tourism figures less rosy than 1Q’s

•Channel check shows weaker 2Q

•3Q not clear yet

Growing more moderately

The weak global macroeconomic conditions have begun to take a toll on the short-term performance of the local hotel industry. Apr figures released by the Singapore Tourism Board show that visitor arrivals grew 9% YoY, much less than the 14.6% YoY growth for 1Q12. Indonesia showed a significant slip in growth rate for Apr (+10.3% vs +16.0% for 1Q). Australia, HK and the UK showed YoY declines of 4.0%-14.4%. Average RevPAR for Apr grew 10.3% YoY versus the 14.7% for 1Q12.

Slower 2Q

We spoke to a hotel rooms wholesaler yesterday and got some impressions. While Apr performance for local hotels was alright, the start of May marked the beginning of a relatively quiet period for hotels, except during Herbalife Extravaganza event (24k people, 18-20 May). We estimate that occupancy growth for May was two-thirds of what was seen for Jan-Apr. 3-star hotels were different from the pack and had strong occupancies around 90%. Jun so far has been quite slow too. As an indication of the less upbeat conditions, hotels are more willing to engage wholesalers and use discounts. Even some 5-star hotels have been cutting rates by 50% at the last minute.

Question marks about 3Q

Jul and Aug are traditionally slow months for the hospitality sector. Hotel figures for Jul last year were very strong (highest occupancy month for all four hotel tiers) and could present a reasonable hurdle for this Jul to outdo. Jul figures currently do not look impressive but the short lead time means that the visibility is reduced. The integrated resorts were exceptions in 2Q and they continue to prove themselves as all-weather attractions, with their hotels clocking good occupancies through till Aug.

Maintain BUY

The long-term growth prospects for the hospitality sector are still positive and we believe our 7.5% YoY RevPAR growth estimate for CDLHT is achievable. We maintain our BUY rating on CDLHT and our RNAV-derived fair value estimate of S$2.04.

SINGAPORE ROOM RATES CAN GROW SUBSTANTIALLY

•Are Singapore room rates steep?

•Rates have room to grow

•More LCC visitors

How expensive are Singapore room rates?

On a worldwide basis, Singapore commands fairly high hotel room rates. To study the relative affordability of Singapore hotels we have examined the average hotel room rates paid by travelers from different places of origin to destinations worldwide. Travelers from China, India, Australia, HK and the UK, which form half of the top ten places of origin for travelers to Singapore in 2011, are willing to pay 24-61% more for a hotel room in the most expensive destinations versus Singapore. For example, travelers from China paid an average of 40% more for a hotel room in London in 2011 versus one in Singapore.

Rates can continue rising

As Singapore continues to become a more attractive travel destination, especially for its trio of MICE, gaming and medical tourism, the premium that the most expensive hotel destinations command over it could shrink substantially with time. Additionally, the nine out of 10 top places of origin for visitors to Singapore are located in Asia-Pacific. With the continued rise of low-cost carriers (LCCs) in this region, intra-Asia travel will increase and people can afford to spend more on hotel rooms. For many, traveling to Singapore is already a lot cheaper than travelling to New York or Venice.

Welcoming long-haul LCC visitors

Singapore’s first long-haul low cost carrier (LCC), Scoot, will be making daily flights to Tokyo and Taipei from 3Q12. Scoot just completed its maiden flight to Australia and will begin flights to Gold Coast next week. The supply-demand dynamics for Singapore hotels remains positive. We project that hotel room supply will increase by 3.7% p.a. for 2012-2015 while hotel room demand will grow faster at 6.4% p.a.

Maintain BUY

CDLHT is one of the few highly liquid, close-to-pure-plays for the Singapore hotel sector. We maintain our BUY rating on CDLHT and our RNAV-derived fair value estimate of S$2.04.

Earnings growth momentum to continue

• Robust prospects for Singapore tourism in 2012

• Positive data points for CDL HT

• BUY, TP adjusted slightly to S$1.99 based on DDM

Singapore – a destination like no other. The value proposition in Singapore’s tourism sector has greatly changed (with the opening of the two integrated resorts, Universal Studios and various shopping destinations) since 2009. Before that, most of the country’s key attractions had not yet opened. Singapore’s main visitor market source remains largely within the Asia-Pacific region (contributing close to 88% of total visitors in 2011 vs 85% in 2010), enabling the country to leverage on the strong intra-regional demand for leisure and business travel. With a slew of new attractions and a strong line-up of MICE events in the coming months, we expect Singapore to remain one of the hot destinations to visit in 2012.

Strong demand for accommodations, from MICE, to benefit CDL HT in 2012. We anticipate strong demand from the MICE sector, with a strong line-up of events in the coming quarters. In addition, the peak tourist periods of 2Q-3Q are fast approaching, and with the annual school holidays and the Formula One race in September, we expect CDL Hospitality Trusts (CDL HT) to continue to deliver sustained earnings growth on a q-o-q and y-o-y basis, fueled by the already high average occupancies of close to c.90%.

Any acquisition will be an upside surprise. CDLHT’s low gearing of 26% gives them debt-funded headroom to acquire. If any is made, this will be an earnings upside surprise as we, and the market, have not factored in any numbers.

BUY, TP raised slightly to S$1.99. While the stock has been re-rated close to c.5% after our recent upgrade, we remain optimistic given the strong underlying fundamentals for the hotel sector in the coming quarters. With an attractive FY12-13F yield of close to 7%, we maintain our BUY call with TP revised slightly as we raised our RevPAR assumptions slightly in the forward years.