Hong Kong Hotel Sector
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Asian Insights SparX Hong Kong Hotel Sector Refer to important disclosures at the end of this report DBS Group Research . Equity 26 Sep 2017 Time to check in HSI: 27,513 ANALYST · Inbound tourism on the recovery path Jeff YAU CFA, +852 2820 4912 [email protected] · High occupancy envisaged despite growing supply Ian CHUI +852 2971 1915 · Hotel transactions are being revived [email protected] Inbound tourism on the recovery path. The number of Top picks visitor arrivals to Hong Kong grew 2.4% in 7M17, led mainly by the return of overnight visitors, especially from Mainland China. Code Price Mkt 12-m Recom This has stimulated the demand for hotel accommodation, 25-Sep Cap target which leads to the recovery in hotel occupancy, particularly for HK$ HK$bn HK$ three-star hotels. Overall, revenue per available room (RevPAR) Far East 35 HK 4.14 9 5.20 BUY Consort.Intl. of three-star hotels rebounded c.15% in 7M17 given the low Langham 1270 HK 3.31 7 3.60 BUY base, but that of five-star hotels was marginally lower as rate Hospitality Inv. pressure lingered. As one of the leading three- to four-star hotel operators in Hong Kong, Far East Consortium is set to be the Source: Thomson Reuters, DBS Vickers prime beneficiary of the prevailing sector recovery. High occupancy envisaged despite growing supply. New hotel supply is anticipated to rise in the coming years with five- year compound annual growth rate (CAGR) of 4.3% between 2016-21. However, based on our projected growth of overnight visitors, we forecast the overall hotel occupancy to stay high at 89-91% in 2017-21, thus supporting room rate and RevPAR growth. Hotel transactions are being revived alongside the market recovery. Buyers are diversified, ranging from local investors to listed Chinese developers. Initial property yield is relatively low at 4% or below, particularly for hotels sold for commercial redevelopment. The buoyant valuations of commercial properties are prompting the redevelopment of selected well- located hotels into office/retail space. This should moderate the supply growth, potentially adding momentum to RevPAR growth. ed-JC Sa-CW Asian Insights SparX Hong Kong Hotel Sector The DBS Asian Insights SparX report is a deep dive look into thematic angles impacting the longer term investment thesis for a sector, country or the region. We view this as an ongoing conversation rather than a one off treatise on the topic, and invite feedback from our readers, and in particular welcome follow on questions worthy of closer examination. Table of Contents Investment summary 3 New hotel supply in focus 4 Revisiting the alternative use of hotels 13 Inbound tourism on the recovery path 15 Gradual change in tourist mix 18 Hotel sector – light at the end of tunnel 19 New tourist attractions 22 Better links with the world 23 Hotel market challenges 24 Appendix 1: Revenue mix 25 Appendix 2: Cost structure 27 Appendix 3: Hotel profitability 28 Appendix 4: Sales & distribution channels 29 Appendix 5: Hotel management 30 Appendix 6: The MICE market 31 Appendix 7: How to secure land for hotel development 32 Stock Profiles 33 Far East Consortium 34 Langham Hospitality Investments 36 Note: Prices used as of 26 Sep 2017 Cover photos (from left): The Excelsior (Mandarin Oriental), Kerry Hotel (Shangri-la Asia.), The Murray, Niccolo (Harbour Centre Dev.) Page 2 Asian Insights SparX Hong Kong Hotel Sector Investment summary Inbound tourism on the road to recovery. Visitor arrivals to In addition, Langham Hospitality Investments (1270.HK) is Hong Kong grew 2.4% in 7M17, mainly driven by the growth tapping the growing demand for hotel accommodation with its of 4.9% for overnight visitors. Those from short-haul markets three strategically located hotels in Kowloon Peninsula. and China grew 4.7% and 5.7%, respectively. For the full year of 2017, we project a 2.4% growth in visitor arrivals to 58m, Growth in hotel supply to accelerate but concerns should not driven primarily by overnight visitors. The number of visitors be overplayed. We forecast total hotel-room supply to increase from China and outside China are forecast to be 2.5% and 2% at a five-year CAGR of 4.3% between 2016 and 2021, higher higher, respectively. During 2017-21, we estimate that total than the corresponding growth of 3.6% in 2011-16. Based on number of visitor arrivals will grow at a four-year CAGR of 4%, our projection of the growth of overnight visitors and hotel- with a similar increase in both overnight visitors and day- room supply, we forecast hotel occupancy to stand at 90% for trippers. 2017, and then hover around 89-91% in 2018-21. With consistently high occupancy expected, hotel room rates and Hotel occupancy on the rise. The return of overnight visitors therefore RevPAR should see upward pressure. has stimulated the recovery of the hotel market. In 7M17, overall hotel occupancy reached 88%, up 3ppts year-on-year. Potential redevelopment of existing hotels into commercial Medium-tariff hotels (equivalent to a three-star rating) showed space to moderate the net supply growth. Given buoyant noticeable improvement, with occupancy up 6ppts to 89% commercial property valuations, we believe an increasing during the period. Occupancies of high-tariff A (equivalent to a number of well-located three -to four-star hotels will be five-star rating) and high-tariff B hotels A (equivalent to a four- redeveloped into office or commercial buildings. If The star rating) are 84% and 89%, up 3ppts and 2ppts, Excelsior, J Plus, and Crowne Plaza Hong Kong Causeway Bay respectively. are redeveloped into commercial properties, hotel inventory in the area would be cut by c.1,200 rooms or 12%. This could Medium-tariff hotels fare much better. With rising occupancy potentially moderate the net growth in hotel-room supply, on one hand and a low comparison base on the other, which should in turn push up the hotel occupancy as well as medium-tariff hotels have regained pricing power. Their room RevPAR growth. rates grew modestly by 6.9% in 7M17, with growth momentum likely to accelerate. This, coupled with occupancy Hotel investment market has turned buoyant since the gains, led to overall RevPAR rising c.15%. On the other hand, beginning of 2017, with a wide array of buyers ranging from room rates of high-tariff A hotels remained under pressure, local investors to China-based developers. Initial property yield declining 5.7% in 1H17. This resulted in a marginal 2.2% has remained relatively low at 4% or below because the hotel decline in RevPAR. market is at an early stage of recovery and as some hotels are purchased for commercial redevelopment. Far East Consortium (35.HK) has emerged as a prime beneficiary. As one of the leading three- to four-star hotel operators in Hong Kong, Far East Consortium is set to be the prime beneficiary of the prevailing recovery of the hotel market. Page 3 Asian Insights SparX Hong Kong Hotel Sector New hotel supply in focus Hotel supply growth in 2006-16 – High-tariff B During 2006-2016, the supply of hotel rooms increased at a '000 Rooms CAGR 2006-2016: 4.3% 10-year CAGR of 4.7%, slightly slower than the 10-year CAGR of 5.3% in overnight visitors in the period. The 25 growth was stronger at 5.9% between 2006-11, and then 20 moderated to 3.6% between 2011-16. 15 Hotel supply growth in 2006-16 10 '000 Rooms 5 80 CAGR 2006-2016: 4.7% 70 0 60 2006 2008 2010 2012 2014 2016 50 HTB 40 30 Source: CEIC 20 10 0 Hotel supply growth in 2006-16 – Medium-tariff 2006 2008 2010 2012 2014 2016 '000 Rooms CAGR 2006-2016: 5.1% Hotel rooms 20 Source: CEIC 15 Among the three categories, high-tariff A hotels registered the strongest CAGR of 5.3% in room supply but the 10 increase was skewed toward the first five years. Between 2011 and 2016, the rate of supply growth moderated 5 remarkably, with the five-year CAGR standing low at 1%. The converse is true for medium-tariff hotel rooms, whose 0 supply rose at a five-year CAGR of 3.4% in 2006-11 but 2008 2010 2014 2016 6.8% during 2011-16. 2006 2012 Med Tariff Hotel supply growth in 2006-16 – High-tariff A Source: CEIC '000 Rooms The growth in hotel rooms is anticipated to gather CAGR 2006-2016: 5.3% 20 momentum in 2017. In 1H17, eight new hotels, which altogether provide c.2700 rooms, opened for business. They 15 include Kerry Hotel in Hung Hom, Disney Explorers Lodge, Silka Tsuen Wan in Kwai Chung, Hotel COZI, Wetland in Tin 10 Shui Wai, and iclub Ma Tau Wai in To Kwa Wan. 5 As at June 2017, there were 271 hotels in Hong Kong, with a total of 77,553 rooms. High-tariff A and high-tariff B 0 hotels accounted for 24.1% and 38.6% of total hotel room inventory, respectively. Medium-tariff hotels made up 2006 2008 2010 2012 2014 2016 30.6% of the total, with the balance (6.7%) being HTA unclassified hotels. In terms of location, Yau Tsim Mong is the most concentrated hotel district in Hong Kong, with Source: CEIC 23,664 rooms or 30.5% of total hotel stock as of June 2017. This is followed by Wan Chai (13.2%) and Central and Western (11.2%). Moreover, Kowloon City and Eastern Hong Kong account for 9.9% and 6.4% of total hotel-room Page 4 Asian Insights SparX Hong Kong Hotel Sector inventory.