Hospitality Sector - State of the industry: 1Q15

What is the news?
Visitor arrivals was subdued. 1Q15 tourist numbers dipped 6.1% y-o-y. For perspective, 2014 visitor arrivals declined 3.0% y-o-y from 2013. The decline in 2014 was the first full year decline since 2009.

Hotel three key metrics of AOR, ARR and RevPAR were lower as well. Dampened by absence of biennial Singapore Airshow and less demand for corporate bookings.

Chinese are tourists choosing Thailand, South Korea, Japan and USA over Singapore. Easing of visa rules, strengthening of CNY and geographical proximity were contributing factors.

Outlook for the sector
Currency headwind of relatively strong SGD will be the overriding factor. Weakened regional currencies that have depreciated against SGD would deter visitors from choosing Singapore as a destination.

Singapore visitor arrivals not likely to meet upper range of STB's estimate of 3%. On the back of a 6.1% y-o-y dip in visitor arrivals in 1Q15, the remaining three quarters would have to each grow by more than 6.1% in order to achieve the upper range of STB's full year estimate.

Average Room Rate (ARR) facing pressure. Combination of weak visitor numbers and upcoming supply of hotel rooms would continue to put pressure on AOR and ARR, and consequently RevPAR.

Continued growth of outbound Chinese tourists. Facilitated by relaxation in visa rules and longer re-entry terms by various countries to woo Chinese visitors. Strengthening of CNY results in higher purchasing power of the Chinese tourist and encourages outbound traffic.

Key risk to the sector is the spread of MERS across the region. 19 fatalities reported in South Korea so far.

Investment Ideas
All things equal, pure-play Singapore Hospitality REITs expected to underperform their Hospitality-peers with geographically diversified portfolios. (Barring DPU-accretive acquisitions and asset enhancement initiatives.) The two pure-play Singapore Hospitality REITs are OUE Hospitality Trust and Far East Hospitality Trust.

Favour Retail REITs with presence in heartland malls over those reliant on Tourist Receipts from Shopping. Frasers Centrepoint Trust (Accumulate: Target Price: S$2.14, Last close: S$2.08)

Exposure to growth in outbound Chinese tourists. Beijing Capital International Airport, HK: 694 (Accumulate, Target Price: HK$9.23, Last close: HK$8.73).

Cautious over lacklustre Singapore visitor arrivals, undermined by strong SGD. SATS Ltd (Reduce, Target Price: S$2.97, Last close: S$3.48). (Read Report)

Source : Phillip Securities Research

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