As the June holiday season comes to an end, many would have returned from their vacations overseas feeling well rested as they go into the second half of the year. An essential part of the travelling experience includes staying at comfortable hotels for a much-deserved rest. Seasonally, hospitality sector tends to see higher activities in the later part of the year and hence why hospitality-related stocks tend to perform more positively.
In OCBC’s latest report, the hospitality sector should be seeing a turn around after a long dreary winter for the industry. Hotel Revenue per available room (RevPAR) has come down by 20 percent from the 2012 peak due to intense competition.
However, as visitors arrival growth continues to rise steadily for the first quarter of the year coupled with a much more subdued increase in room supply, the sector should see better days ahead.
Besides the local hospitality sector, China also sees a recovery in the hospitality industry, especially for luxury hotels. High-spending millennials are driving demand for luxury hotel rooms in China, outpacing supply and hence boosting RevPAR.
Legislation change to the country’s mandatory paid leave system since 2017 saw the government stepping in to improve China’s labour protection. Paid leave encourages the working class to go on holidays and hence has been spurring domestic tourism in the country. Indirectly, the new legislation has also spurred the development of infrastructure and hospitality assets in China.
Domestic tourism is expected to continue being the key driver of tourism growth in China, with a whopping 2.5 billion of domestic tourists in the first half of 2017 as compared to 69.5 million inbound tourists. While millennials with rising spending power continues to grow at dizzying speed, the growth of the luxury hotel has decreased significantly since 2012. This would culminate a tightening demand-supply dynamics to bode well for the luxury hotel assets in China.
Given the more significant difference between the luxury hotel and home-share alternatives such as Airbnb, luxury hotels are more resilient as compared to other more budget-friendly hotels.
Based on this, OCBC has fixed its eyes on Shangri-La Asia, a hotel asset owner with a portfolio of luxury five-star hotels and resorts located at pristine locations. OCBC has a Buy call on the stock with a fair value of HK$21.05. The target price represents a 44 percent potential upside from the current share price of HK$14.62.
Amongst the S-REIT space, OCBC preferred pick is Far East Hospitality Trust as analysts believe that the market is undervaluing the REIT by discounting the operational upside. OCBC ascribed the REIT a Buy call with a fair value of $0.735. Currently, Far East Hospitality Trust is trading at $0.625 per unit.