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SHANGRI-LA ASIA(0069.HK):MARGIN EXPANSION THE NEXT DRIVER; LIFT TP TO HK$22

德意志银行 ·  2018/03/07 00:00  · 研报

Expect a strong FY17 results on March 23rd

Global luxury hotel chains reported strong 2H17 China RevPAR with growthaccelerating from mid-to-low single-digit yoy in 1H17 to mid-to-high single-digityoy in 2H17. For Shangri-la, currency turned from a drag in 1H17 to a boost in2H17. As such, we expect Shangri-la's FY17 recurring net profits to recover toUS$180m (+30% yoy)。 For 2018, we see margin expansion as stronger businesstravels lift luxury room rates in Tier 1 cities while efficiency initiatives keep costsrelatively flat. We thus think 2018 EBITDA margin can expand 4ppts to 30%,pushing EBITDA up 30% on back of a 7% group RevPAR growth assumption. Lift2018-19 EBITDA by 8%. Reiterate Buy with a new TP of HK$22 for 26% upside.

Peers saw China RevPAR growth accelerated in 2H17

Global hotel chains have reported strong demand recovery for luxury hotels inChina, with RevPAR growth accelerated from low-to-mid single-digit yoy in 1H17to mid-to-high single-digit yoy in 2H17. Some even saw double-digit yoy growthin 2H17.

InterContinental (IHG.L, Hold, GBP4,490) - Greater China cFX RevPARgrowth accelerated from 4.1% yoy in 1H17 to 7.6% yoy in 2H17. Inparticular, mainland China cFX RevPAR growth sharply accelerated from4.7% yoy in 1H17 to 8.0% yoy in 2H17.

Marriott (MAR.OQ, Hold, USD135.7) - Greater China (constant US$)RevPAR growth accelerated from 6.9% yoy in 1H17 to 9.9% yoy in 2H17.

For 2018, mgmt expects Greater China to lead growth in the Asia-Pacificregion.

Hilton (HLT.N, Buy, USD78.2) - 2H17 Greater China RevPAR +11% yoy,outgrown Asia-Pacific region (+8% yoy)。 For 2018, mgmt expects ChinaRevPAR growth to be sustained at 6-7% yoy

2017 results preview: China hotels likely returned to profitability

On back of the currency swing, we estimate Shangri-la's Group RevPAR growthaccelerated from 0% yoy in 1H17 to 8% yoy in 2H17, bringing full-year GroupRevPAR growth to 3%. In 2017, Shangri-la added 7 new hotels, boostingsystemwide room count by 3%. On back of 7% sales growth in FY17, we estimateEBITDA grew 5% to US$530m on flattish margin. Given a high financial leverage(D&A and finance cost almost 90% of FY17E EBITDA), we estimate recurring net profits grew 30% in FY17. The biggest swing came from China where weestimate Shangri-la's RevPAR +9% in FY17, allowing its China hotel business toreturn to profitability after a net loss in FY16.

A multi-year RevPAR recovery cycle; risks

We lift Shangri-La's 2018/2019 recurring net profit by 5%/7%, and our SOTPtarget price from HK$20 to HK$22. We use SOTP to value the stock. For thehotel segment, we use 16x target multiple on our 2018F hotel EBITDA. For theinvestment property segment, we use a target discount of 45% to NAV. Thismeans that our new TP is at a 40% discount to our NAV estimate of HK$37.5,which is slightly above historical average (45%)。 We think the above-averagetarget multiple is justified as the China luxury hotel industry is on a multi-yearrecovery phase. Risks include faster-than-expected interest rate hikes as thecompany has a very high (65%) net gearing ratio and only c. 30% of the company'sinterest expenses are in fixed-rate.

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