Hotel Industry 18.01.11

8/7/2019 Hotel Industry 18.01.11

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Hotels and Travel Sector

Analyst: RanminiVithanagama

Date: 18 th January 2011

Hotels and Travel Sector

Promising start, yet more to be doneGrowth Prospects

The tourism sector has been one of the key beneficiaries of theend of the internal conflict as indicated by the 46% YOYincrease in tourist arrivals to 654,476 in 2010.

With its variety of tourist attractions within a few hundredkilometers and strategic location in the Indian Ocean, Sri Lankais at an advantaged position compared to competitors inproviding a comprehensive tourism experience.

New Initiatives

International hotel brands such as Shangri La and Six Senses andSpa are set to invest in the country, the lack of which was a keydrawback for Sri Lanka in attracting high-spending tourists.

Flexible measures innovated by authorities (such as the OneStop Shop) to encourage investment in the tourism sector wouldalso promote much needed investments in the industry.

Concerns

We feel that Sri Lanka is increasingly becoming an expensivedestination. Therefore, in order to further increase rates it isnecessary to improve the quality in terms of entertainment,infrastructure etc.

Sri Lankas plans to raise its tourist arrivals to 2.5 Mn by 2015requires an increase in the rooms available to about 35,000 40,000 in our opinion, from about 15,000 at present. This wouldnecessitate an investment of about US $ 3-4 Bn over the next 5years, which may prove to be challenging unless a number of global brands invest in Sri Lanka.

Recommendations

The prices of most hotel sector stocks have appreciated with theinvestor optimism on the sector. We have identified Asian Hotelsand Properties (AHPL), Confifi Hotel Holdings (PALM),Riverina Hotels (BHR), Hotel Sigiriya (HSIG) and Nuwara EliyaHotels (NEH) as potential investments that indicate furtherupward potential.


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Sri Lanka as a Potential Attractive Destination

Sri Lanka has been known for its scenic beauty and unique culture fromolden days. However, with the outbreak of the internal conflict, the resultantinsecure situation had discouraged tourists from visiting the country.

The situation reversed with the end of the conflict in May 2009. The mainhindrance to the flourishing of the tourism industry removed, Sri Lanka hasnow entered an era of tourism sector growth.

The removal of travel restrictions placed against Sri Lanka (by Germany,Belgium, United Kingdom and the USA, for example) and the recognition of Sri Lanka as a key tourist destination (by New York Times and NationalGeographic, for example) have set the right tone for the industry. Thegovernment is planning to attract 2.5 Mn tourists annually by 2015.

A Diverse Mix of Nature and Culture

Sri Lanka boasts of a history of over 2,500 years, which has endowed thecountry with a stock of archeological sites that are rich in historic value.Anuradhapura, Polonnaruwa, Sigiriya and Dambulla are among the mostprominent of the tourist attractions of historical value. Kandy Esala Peraheratops the list of cultural wonders Sri Lanka has to offer.

The sunny and sandy beaches, summer throughout the year, the hill countrywith waterfalls and cool weather, plantations and wildlife sanctuaries are allpart of natural beauty Sri Lanka has to offer. Increased popularity of ecotourism in Sri Lanka provides nature lovers with the opportunity of enjoying nature in its most primitive and unaffected form.

Surfing in Arugam Bay and snorkeling and diving in Trincomalee are likelyto add to the variety of entertainment for tourists visiting Sri Lanka. Further,the knee deep shallow sea along the east coast is a fresh addition to the sitesof attraction in Sri Lanka post war.

What is particularly special about Sri Lanka as a tourist destination is that avast spectrum of natural and cultural diversity is available within a fewhundred kilometers, a key competitive advantage against other touristdestinations in the region.


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$0

$40

$80

$120

$160

$200

0%

20%

40%

60%

80%

100%

Asia Pacific Japan Australia China India Singapore

Occ up ancy R ate 2009 Oc cu pa ncy R ate Ja n- Aug 10

RevPAR 2009 RevPAR Jan-Aug 10

Source: BeautifulSriLanka.com

Global Tourism Trends

Global tourism took a hit from the financial crisis that plagued countriesacross the world in 2008/09. As a result, global hotel room rates on averagedropped 14% YOY in 2009, and were cheaper than room rates in 2004,according to Hotel Price Index (HPI).

However, in 2010H1, both European and American hotel prices have showna modest recovery, indicating early signs of a global tourism and travel sectorrecovery.

Source: Asterisk Reality, Tokyo, HPI

Sri Lanka and its Manifold Attractions

Occupancy Rates and Revenue per Room (2009 vs. 2010)


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0

15,000

30,000

45,000

60,000

75,000

90,000

Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

2009 2010

40.5%

26.2%

10.5%

6.3%

5.9% 5.2% 5.0%0.3%

0.1%

W.Europe S.Asia E.A sia N. America Middle-East

E.Eu rope Aus tralas ia Africa Caribbean

Taking into account the still subdued economic conditions in the US andEurope, we believe the tourism and travel sector recovery would be slow in2011. Discretionary expenditure is likely to recover relatively slowly evenafter a full economic recovery .

Tourism Arrivals in Sri Lanka

Sri Lankas tourism industry in 2010 enjoyed the peace dividend, with totaltourist arrivals in the country recorded at 654,476, up 46% YOY. We expectover 730,000 tourist arrivals for 2011.

Source: SLTDA

Sri Lankas tourist portfolio largely consists of Western Europeans, followedclosely by Asians, particularly South Asians. Furthermore, India is the largest

source for Sri Lankas tourism industry, followed by the UK.

Source: SLTDA

Tourist Arrivals

Tourist Arrivals by Country of Residence


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0% 5% 10% 15% 20% 25% 30% 35%

31 nights & Over

22-30 nights

15-21 nights

8-14 nights

4-7 nights

1-3 nights

2009 2008

0 2 4 6 8 10 12 14

Australasia

Asia

Africa

Middle-East

E. Europe

W. Europe

L. America

N. America

Days

2009 2008

The International Monetary Fund (IMF) forecasts an economic growth 8.4%for India, and 8.5% as a whole for developing Asia in 2011. This contrastswith a much more subdued growth rate of 1.6% forecast for the EuropeanUnion.

Therefore, we believe that Asian countries are likely to have a stronger

footprint on Sri Lankas tourist portfolio. Therefore, it is important that SriLanka targets high spenders from these regions, particularly India and China.Currently, the long haul tourists from Western Europe are usually the highspenders, whereas tourists from South Asia mostly come on a limited budget.

Duration of Stay

Overall, the duration of stay in Sri Lanka in 2009 has been 9.1 nights,although the average duration of stay has been 10 nights for the most partsince 1978.

Source: SLTDA

Further, tourists from Western Europe and North America have on averagestayed over 10 nights in the island, whereas Asians have averaged less than 8nights.

Source: SLTDA

Average Duration of Stay (2008 vs. 2009)

Average Duration of Stay by Country of Residence (2008 vs. 2009)


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Number of Hotel Rooms (Star Category)

0

1,000

2,000

3,000

4,000

5,000

6,000

5-star 4-star 3-star 2-star 1-star U nclassified

Since a longer duration of stay is associated with increased spending, it yieldshigher revenue per tourist.

Seasonality

A seasonal aspect is inherent in the tourism industry. In Sri Lanka, the peak

season for tourism is usually from late November to April, with the onset of winter in the northern hemisphere. Statistics from 1967-2009 indicate thatgenerally May, June, September and October are the dullest months, withrelatively low tourist arrivals.

In order to achieve an average annual occupancy rate of about 85% and fullyutilize the limited supply of rooms, it is important to promote tourism in theoff season. Therefore, special events and entertainment activities need to beorganized during the off season.

Room Availability

Sri Lanka has a total of 249 hotels and 14,461 rooms (as of July 2010). Out of these, approximately 21% were in the 5-star category.

Source: SLTDA

About 39% of the room supply is situated in Colombo (22%) and GreaterColombo (17%), with a further 34% located in the South Coast.


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15

30

45

60

75

90

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

%

2009 2010

Number of Hotel Rooms (By Region)

0

1,000

2,000

3,000

4,000

5,000

6,000

Colombo City Greater Colombo

South Coast East Coast Hill Country Ancient Cities

Source: SLTDA

According to our estimates, the capacity for a month is about 90,000 tourists.Therefore, even if tourism is promoted during off season, the maximum

number of tourists that could be accommodated for a year would be less than1 Mn. We believe that an addition of about 20,000-25,000 rooms is requiredto cater to the anticipated influx of 2.5 Mn tourists by 2015.

In order to attract high end tourists and to raise room rates it is important tohave the lower graded/ungraded rooms upgraded, in addition to investing innew rooms.

Occupancy Rates

With the end of the internal conflict in May 2009, there has been a markedimprovement in occupancy rates.

Source: SLTDA

Furthermore, occupancy rates have been highest in the 5-star category hotelsin January-July 2010, closely followed by 4-star hotels . Higher demand for 5-star hotels signals the presence of high-spending tourists in Sri Lanka.

Average Occupancy Rates


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40

50

60

70

80

90

Colomb o Grea ter Colomb o South Coast Ea st Coast

%

2010E 2011E

Source: SLTDA and NDB Stockbrokers

Room Rates

The room rates have thus far increased by over 25% from the 2009 levels,according to industry experts. While room rates depend on a variety of factors including the star category, the product offering and the location, ingeneral rooms located in Colombo and the South Coast have recorded asignificant increase in room rates.

The Average Room Rate (ARR) is a widely used measure in the sector toindicate revenue per room. The total revenue earned from the sale of hotelrooms for a day (excluding food etc) is divided by the number of rooms thatwere occupied to calculate the ARR.

Generally about 50-60% of room sales are through travel agents. The marginsare relatively less than in walk in room sales, as a fixed rate of payment hasto be made to the travel agents.

Regional Competition: Malaysia

In addition to beaches, islands, wildlife and history and theme parks thatattract tourists to the country, Malaysias capital offers metropolitan tourismwith high rising buildings, premium restaurants and hotels and high endshopping experiences as well as bargain shopping experiences such asMalaysia Year End Sale (M-YES).

In 2009, the total tourist arrivals to Malaysia were 23.6 Mn, with the bulk of its tourist coming from neighbouring Singapore. The country had a total of 168,844 rooms to cater to this demand.

Occupancy Rates by Region


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Sri LankaSri LankaSri LankaSr i Lanka MalaysiaMalaysiaMalaysiaMalaysia BaliBaliBaliBali

Tourist arrivals (2010) 654,476 22,454,175* 926,453**Earnings Per Tourist - US $ (2009) 740 727 1,195 Average length of stay (nights) 9.1 6.7 8.8Average occupany rate (2009) 48.4% 60.9% 53.0%No. of rooms (2010) 14,461 168,844^ NA Room rates (US $ per night)^^Room rates (US $ per night)^^Room rates (US $ per night)^^Room rates (US $ per night)^^

5 star 110-450 125-850 200-3,0004 star 95-250 85-300 150-1,0003 star 55-160 70-250 100-500*Jan-Nov 2010

**Jan-May 2010

^ 2009

^^ Bed & breakfast basis

Regional Competition: Indonesia (Bali)

Indonesia, an archipelago consisting of 17,508 islands boasts of the thirdlargest shoreline in the world. Both nature and culture of Indonesia attracttourists to the country

Bali, an island with an area of 5,600 sq. km, is one of Indonesias mostpopular tourist destinations, and has been promoted internationally as aseparate state.

In addition to beaches and related activities such as scuba diving, surfing andsnorkeling, Bali has mountains, volcanoes, wildlife and a rich culture toattract tourists. Additionally, Bali is also widely promoted as a location forinternational conferences, a trend known as Congress Tourism.

In 2009, there were 2.2 Mn tourist arrivals in Bali. The island has a total of 639 hotels to cater to its tourism demand. Of them, about 12% belong to the5-star category, while a further 34% belongs to the 4-star category.

Source: SLTDA, Tourism Malaysia Research, Reuters, Ministry of Culture and Tourism,Indonesia, Asiahotels.com and TripAdvisor.com

Future Outlook: Promoting Sri Lanka as a Tourism Hub

A number of positive developments are taking place to convert Sri Lanka intoa tourism hub. The One Stop Shop introduced by the Sri Lanka TourismDevelopment Authority (SLTDA) has reduced time delays associated withprocessing of investment proposals. Under this system, officials from 7-8organizations (e.g. local authorities, Urban Development Authority,Department of Forestry etc) meet once a fortnight to decide on the eligibilityof applications.

Snapshot of Tourism Statistics (Sri Lanka, Malaysia and Bali)


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Initiatives have been taken to introduce globally known hotel chains in SriLanka.

Shangri-La Group plans to build a US $ 500 Mn luxury hotel andapartment complex in Colombo (We estimate that approximately50% of the investment would be for the hotel).

Six Senses and Spa is in a 50:50 joint venture with AitkenSpence Group to develop its first property in Sri Lanka by 2012.

Minor International (of Thailand) in partnership with HemasHoldings plans to expand its existing property and build a newresort under the global brand Anantara.

China National Aero Technology Import and Export Corporation(CATIC) plans to build a multifunctional complex comprising afive-star hotel and a shopping mall, at a combined investment of about US $ 500 Mn (We estimate that approximately 50% of theinvestment would be for the hotel).

In 2008, the government decided to develop the Kalpitiya peninsula in thePuttlam district (in the west coast of Sri Lanka) as a special tourist project(similar to the Bali concept of Indonesia). The Kalpitiya peninsula is a uniquedestination with a group of 14 islands of different sizes. One island is beingdeveloped as a location exclusively for casinos, with a view to promoteentertainment for tourists. Currently, bids are being called from prospectivedevelopers, with global hotel chains expected to be amongst them.

The eastern region is being developed as a tourist destination, with an area of about 500 acres identified for tourism development in Kuchchaveli in theTrincomalee district. Additionally, Mannar, Jaffna and Nandikadal in thenorthern part have also been identified as potential tourist destinations, andplans are underway to put up several resorts in these areas.

Steps are being taken to increase air transportation within Sri Lanka for thebenefit of tourists. Sri Lankan Airlines operates 6 aircraft for domestictransportation which includes 4 sea planes. The military helicopters are alsocurrently being used to transport tourists. Further, the Senok group of companies has been granted the license to operate a domestic helicopterservice, while Deccan Aviation and Cosmos also run domestic air services.

The government budget proposals for 2011 have taken steps to encourage thehotel industry in the form of corporate income tax reductions from 15% to12% on earnings from tourism and related businesses. Additionally, customduties and VAT on various machinery and equipment (which are notavailable in Sri Lanka) will also be reduced to facilitate refurbishment andexpansion of hotels. Further, taxes on branded consumer durables have beenlowered to popularize shopping among tourists.

Co-hosting the ICC World Cup Cricket in 2011, and the Visit Sri Lanka 2011programme would draw international attention to Sri Lanka, and also provide


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0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

2007 2008 2009 2010E 2011E 2012E

% of GDP

Contribution from Hotels and Restaurants Subsector to GDP

the platform to showcase the cultural and natural heritage of Sri Lanka to alarger cross section of the global community.

Source: CBSL and NDB Stockbrokers

Headroom for Improvement and Challenges

In comparison to Malaysia and Bali (Indonesia), Sri Lanka lags behind interms of the quality of hotels available in the country. Malaysia, Thailand andIndonesia are all characterized by the presence of international hotel brandssuch as Sheraton Resorts, Westin Hotels, Marriot Hotels, Six Senses Resortsand Four Seasons, which attract high-spending tourists. Although, progress isbeing made in this direction, we feel that there is further room forimprovement.

We also note that Sri Lankas hotel room rates have picked up, making SriLanka a relatively expensive destination. Hence, Sri Lanka needs to focus onimproving the quality of the product offered (in terms of luxury hotels, easeof transport, entertainment etc) in order to further increase the rates.

We are of the opinion that it is important to improve the ease and quicknessof mobility from one site of attraction to another, as well as entry into thecountry (the expansion of the airport). While the road network and domesticair transportation are being developed, it is still too early to gauge the successof these measures.

Sri Lanka also should focus on expanding its product offering, with a view totaking the tourism experience beyond traditional borders of nature andculture. Entertainment in the form of theme parks, shopping sprees, high-endrestaurants and pubs need to be added to the stock of Sri Lankas touristattractions.

The absence of private beaches (for hotels) is a competitive disadvantage forSri Lanka (when compared with Maldives). As such, the activities of the


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0

2,000

4,000

6,000

2-Jan-08 2-Jul-08 2-Jan-09 2-Jul-09 2-Jan-10 2-Jul-10 2-Jan-11

H&T Adj. ASPI

Tourist Police need to be strengthened to ensure that tourists are not harassedby intruders.

The recent removal of Visa on Arrival to Sri Lanka is seen by the industryas a drawback, which the government may have to reconsider. (Thegovernment reduced the electricity tariff hike it had initially planned heeding

to industry request).

The requirement for about 20,000-25,000 rooms over the next 5 years mayrequire investment worth approximately US $ 3-4 Bn. Although investmentsare trickling in, achievement of the above would be challenging. Further, it isimportant that the new hotel projects are in the 4-5 star-categories, if we areto attract high-spending tourists going forward.

Recommendations

The hotel sector index has gained substantially compared to the ASPI withthe end of the civil war in May 2009.

Source: Colombo Stock Exchange

We have used the following mechanism to identify prospective investmentsin the hotel sector:

Increased the occupancy rate of hotels by 5-10% (From the averagefor 2010) to compute the occupancy rates for 2011. The range was

between 70-80% depending on the hotel. Increased room rates by 5-15% to compute the average rate for 2011

(compared to 2010). The range was between US $ 70220 dependingon the hotel.

Identified the stocks with lowest P/Es based on estimated earningsfor FY11/12.

Hotel and Travel Sector Performance vs. ASPI


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FY11/12E FY09/10Net Profit Net Profit PBV (X) EPS (Rs)

Amaya Leisure 219.35 69.32 36.20 3.14 5.22 21.77 113.60 Keells Hotels 1,491.83 204.96 7.55 2.58 1.02 19.03 19.50 Confifi Hotel Holdings (PALM) 190.16 (20.82) 195.17 1.28 26.41 9.47 250.00 423.00 BUYCeylon Hotels Corp 147.00 (39.12) 27.47 1.40 0.86 45.00 38.50 Serendib Hotels 101.03 43.97 46.08 2.90 8.36 15.97 133.50 Aitken Spence Hotels 1,511.01 523.78 24.66 4.30 4.49 23.61 106.10 Colombo

Galadari 261.87 (351.99) 7.37 5.16 1.44 26.47 38.00 Renuka City Hotel 127.96 (194.52) 231.88 1.72 18.28 21.83 399.00 Hotel Services 236.74 (54.79) 9.14 2.83 1.35 19.25 25.90 Trans Asia 810.30 104.22 44.03 4.87 8.10 26.49 214.60 Taj Lanka 465.99 (36.38) 14.87 5.08 3.34 22.62 75.50 Asian Hotels and Properties (AHPL)3,067.69 629.83 56.00 3.46 13.86 14.00 194.00 221.71 BUY

Dolphin Hotels 118.65 57.17 20.43 3.03 3.75 16.52 62.00 Marawila Resorts 70.42 (36.12) 6.39 2.16 0.57 24.01 13.80 Pegasus Hotels 124.13 12.10 30.70 2.41 4.54 16.31 74.00 South Coast

Eden Hotel Lanka 207.57 3.02 23.97 2.59 3.57 17.38 62.00 Riverina Hotels (BHR) 177.99 (26.20) 122.00 1.11 12.55 10.83 135.90 188.00 BUYRoyal Palms 118.93 78.66 25.53 3.21 2.38 34.48 82.00 Lighthouse Hotel 193.03 22.69 49.21 1.32 4.20 15.49 65.00 Fortress Resorts 165.43 (78.91) 4.69 4.82 1.49 15.15 22.60 Tangerine 114.00 29.50 88.44 1.10 5.70 17.02 97.00

Hotel Sigiriya (HSIG) 68.05 (1.77) 23.45 3.39 11.61 6.84 79.50 174.00 BUY

Sigiriya Village 57.96 (5.44) 41.48 2.76 6.44 17.78 114.50 Hill Country

Hunas Falls 30.90 5.47 12.08 7.78 5.49 17.11 94.00 Mahaweli Reach 64.16 33.38 10.16 3.72 1.36 27.73 37.80 Nuwara Eliya (NEH) 164.75 50.32 922.35 0.93 82.22 10.46 860.00 1,233.00 BUYKandy Hotels 102.45 3.64 256.88 0.97 6.21 40.26 250.00

IntrinsicValue (Rs)BV (Rs)

Share Price(Rs) as at

18.01.2011

Diversified

Greater Colombo

Ancient Cities

Figures are in Rs Mn P/E (X)

We did not consider PBV as a criterion which would be used forlonger term valuations.


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This document is based on information obtained from sources believed to be reliable, but we do not make any representations as to its accuracy,completeness or correctness. Opinions expressed are subject to change without notice. Any recommendation contained in this document does not haveregard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken as substitution for the exercise of judgment by addressee. N D B Stockbrokers (Pvt) Ltd and its associates, theirdirectors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to performbroking, investment banking and other banking services for these companies.

NDB Stockbrokers (Pvt.) Ltd5 th Floor

# 40, NDB BuildingNawam Mawatha

Colombo 02Tel: +94 11 2314170 (Hunting)

Fax: +94 11 2314180

+94 11 2314181

Prasansini Mendis [email protected]

Research

Waruna [email protected]

Viranthi Kumarage

[email protected]

Ranmini [email protected]

Damith [email protected]

Sales

Gihan R. [email protected]

Aroos Faleel

[email protected]

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Hotel Industry 18.01.11

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