Hotel: Downgrade due to tourism slowdown

DBS Research has downgraded the Singapore hospitality sector from 'positive' to 'neutral' following a 4% year-on-year decline in tourist arrivals numbers for June and July citing concerns of a weaker global economy and the impact of inflationary pressures on discretionary spending among travelers and companies in the region.

The research house noted in its report that while the average room rates (ARR) and revenue per available room (RevPAR) in Singapore were still higher compared to a year ago after a strong showing in the first half of the year, the growth momentum might already be slowing.

For the first half of 2008, the average rate for a hotel room in the Republic rose 24% to S$251 while occupancy rates averaged above 80%. For July, the hotel RevPAR still managed to card a year-on-year growth of 7.1% to S$202 while the ARR for July was S$238, up 14% year-on-year amid stable occupancies of 85%.

The local research house noted however that while July saw a slight rebound in tourist arrivals – up by 12% to 916,000 from June numbers – it was actually down 3.8% from the same month a year ago due to larger-than-expected declines in arrivals from Singapore's top three market segments: Indonesia, China and India.

It added that the drop in visitors from these markets might have stemmed from the high inflation rates in India (10%) and Indonesia (11%), which could have forced denizens in these countries to cut back on their travel plans. The Sichuan earthquake, might have also led to many Chinese canceling their traveling plans.

The raising of fuel surcharges by airlines to counter rising operating costs has also dented regional tourism. Singapore Airlines (SIA) for example has raised its fuel surcharges three times this year, which has seen surcharges for flights between Singapore and Asean countries gone up by 54%.

A Straits Times report on 6 September also notes that domestic tourism is on the rise in Taiwan and South Korea, pointing out that both Korean Air and Asiana Airlines have raised their add-on fees for intra-regional flights to Southeast Asia from US$124 to US$164. The decline of the Korean won has also make overseas travel dearer for Korean nationals. As a result, beachside hotels in the country have since seen their occupancies rise from 70% to 90% due to more Koreans opting for a domestic rather than an overseas vacation.

Noted DBS Research, "Given two months of slowing growth, there is a risk that actual tourist arrivals might fall short of the Singapore Tourist Board's (STB) target of 10.3 million visitors for the full year."

It added that there could be downward pressures on room rates if tourist arrivals continue to falter in the coming months and pointed out that hotels here might be forced into reviewing their current pricing policies and offering discounts through travel agencies and credit card companies to attract guests should demand weakens further.

"Our discussions with hoteliers and travel agencies unveiled that booking patterns have changed. Guests now book up to only one month in advance, instead of three months about a year ago," said DBS Research.

While the Formula One race in September will definitely help to raise Singapore's profile as a travel destination (40,000 tourists are expected to visit Singapore for this event), it noted that it does not expect strong tourist arrival growth in 2009 due to the lack of major conventions and events so far on next year's calendar.

"(Hence) we believe hoteliers' earnings might have peaked in the first half of 2008 on the back of strong growth in room rates and stable occupancies. Moving into the second half of 2008, we expect lower earnings as hoteliers could be forced to moderate room rates due to slowing demand.

DBS Research expects Singapore's average RevPAR growth to moderate to S$202 in 2008, and decline by 5% to S$191 in 2009.

While average occupancies are likely to remain stable at 83% in 2008, it may weaken slightly to 81% on the back of increasing room supply from new hotels such as those from Marina Bay at the end of the year. Total hotel room inventory is expected to grow by 4,200 rooms in 2009 (+14%) and by 3,800 rooms in 2010 (+10%).


DBS Stock Recommendations

Ascott Residence Trust: Buy (TP S$0.985)
We believe ART is exposed to the least earnings risks among its hospitality peers. Its regional portfolio exposure should cushion against potentially weaker room rates. In addition, its average portfolio lease of 8 months should delay the impact of lower spot rates. Hence, ART remains a BUY, with a target price of S$0.985

CDL Hospitality Trust: Hold (TP S$1.23)
While we continue to be attracted to its exposure to the local tourism scene in the medium term, near-term headwinds from a slowing tourism industry might have led earnings to peak in 1H08. And coupled with an expected contraction in FY09F DPU, its share price performance could be capped in the near term. However, the 10% dividend yield for FY08F should limit further downside in the near term. Our S$1.23 target price is based on 15% discount to DCF value of S$1.45. It is currently trading at 9.8% FY08F and 9.0% FY09F DPU yield

Amara Holdings: Fully Valued (TP S$0.28)
Amara's results had been disappointing since the start of the year. We were bullish on its prospects then premised on its two Singapore hotels and property development operations, but execution has been slow in translating into earnings. In addition to the double whammy from a slowing tourism industry and a subdued property market, it might need further resources to fund its Shanghai hotel, which would raise financing costs. Downgrade to Fully Valued at S$0.28.

Hotel Properties: Hold (TP S$2.01)
We anticipate more challenges ahead for HPL, arising from a slowing tourism sector and property market. In addition, the unresolved legal case involving the Horizon Towers and Gillman Heights en-bloc purchases could be a drag on its share price in the near term. Maintain Hold with target price of S$2.01

Singapore Land: Hold (TP S$6.42)
Singapore Land remains a Hold due to a slowing office market and potentially softer room rates given a subdued outlook for Singapore’s tourism sector.

United Overseas Land: Hold (TP S$3.23)
UOL remains a Hold on the back of possibly negative news flow of a slowing office market and hotel sector. We used a steeper 30% discount to RNAV to derive our target price of S$3.23

Hotel Grand Central: Hold (TP S$0.81)
Maintain Hold on HGC on the back of possibly negative news flow of a slowing hotel sector. Its higher reliance on tourists for its Singapore Grand Central hotel might lead to room rate cuts when occupancy levels fall. We lowered our target price to S$0.81

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