What surprised us
Hongkong and Shanghai Hotels (HSH) reported 1H15 revenue of HK$2690mn,-1.0% yoy. This was driven by a 3.0% decline in hotel revenue, butpartially offset by improved HK rentals and other businesses. EBITDA ofHK$642mn, down 2.7% yoy, mainly on soft HK demand and weakerUS/Europe margins, was in line with our forecasts. DPS was HK 5.0, flatyoy. Adjusted BVPS (hotels mark-to-market) was HK$25.96, flat hoh. HotelRevPAR for HK/ other Asia/ US & Europe was-10.0% / + 13.2% / + 5.1%. HKRevPAR, the key focus at the briefing, was down 16.5% in 2Q alone, mainlydriven by room rates decline. Management sees this as caused by achange in customer mix rather than intentional price cuts, amid a declinein customers from Japan and China in particular.
What to do with the stock
The company has 3 JV development projects in various stages, including ahotel/residential project London (attr. HK$1.6bn capex), and two hotels inYangon (HK$0.5bn) and Istanbul (HK$1.3bn) respectively, which we see asa substantial pipeline, which has only 10 hotels in operation. We thinkHSH's focus near-term will be on the planning/execution of these projects.In addition, HSH will also carry out renovations in Chicago (HK$278mncapex) and Beijing (HK$1.1bn). Looking ahead, mgmt expects challengesin HK to remain, but gave limited guidance amid relatively short bookingwindows, and was hopeful not to repeat some one-off drags seen in 1Hincluding security concerns in Paris and adverse weather in New York. Thestock trades at 12.1X 2015e EBITDA (attr.), 22x 2015e PER, and 2.3% 2015Edividend yield. We maintain our 12-month SOTP-based TP of HK$10.40.Risks: faster-than-expected margin improvement.