SINGAPORE (Oct 21): Shangri-La Asia — owner of Shangri-La Hotel on Orange Grove Road, Shangri-La Apartments on Anderson Road, Shangri-La Residences on Ladyhill and Tanglin Place on Tanglin Road, which are all situated on freehold land in Singapore — has fallen some 60% from its HK$18 high in January 2018, and is now hovering around HK$7.84. At this price, the stock is trading at just 0.58 times its net asset value (NAV) of US$1.73 per share. Price-to-net asset value (P/NAV) is at its lowest level since 2015 (see Chart 1).
The company, listed in Hong Kong with a secondary listing on the Singapore Exchange, reported a 1.7% y-o-y rise in revenue to US$1.19 billion ($1.63 billion) for the six months to June 30 this year. China accounts for 41.5% of Shangri-La Asia’s assets and is the largest contributor to revenue at 37.7%, followed by Hong Kong, which contributed 16.2% to revenue in 1HFY2019 and accounts for 10.5% of assets. Singapore contributed 10.9% to revenue, and accounts for 12.1% of valuation (see table). The Philippines, where the company owns a Shangri-La-branded hotel that sits on freehold land in Manila, contributes 7.2% to revenue and accounts for 4.2% of valuation.
Shangri-La Asia also owns Shangri-La branded hotels in Kuala Lumpur, Batu Feringghi in Penang, Bangkok, Chiangmai, Paris, Istanbul, Manila and Mauritius, all situated on freehold land. In total, Shangri-La Asia owns and manages hotels under four brands: Shangri-La Hotels and Resorts, Kerry Hotels, Hotel Jen and Traders Hotels.
“As at June 30, we operate/own 102 hotels and have management contracts with 101 hotels, of which 20 are not owned,” a Shangri-La Asia spokesman says. “In general, we have three types of property assets — operating assets (all hotels), investment assets (what we call “investment properties”, which cover all rental-yield assets such as offices, retail spaces and serviced apartments) and assets developed for sale (typically residential units).”
With such an extensive array of hotel and commercial properties — which market observers say could be undervalued on Shangri-La Asia’s balance sheet — the company could easily form a real estate investment trust of those properties that are stabilised. This is a growing trend with international hotel brands, where the hotels are held in REITs and operated by hotel brands under management contracts.
“As to our business model, we will continue to do a combination of both ownership and pure management,” the spokesman says.
The company has its challenges, of course. The majority of Shangri-La Asia’s properties are in China, including in second- and third-tier cities such as Daqing, where the company had to impair a hotel by almost US$40 million. Ten of its 11 projects under development in the country are situated in mainly second- and third-tier cities, where oversupply is a known problem.
Still, although Shangri-La Asia uses fair value revaluation for some of its investment properties, which cover all rental-yield assets such as offices, retail spaces and serviced apartments, analysts suspect that the freehold properties in Singapore’s upscale District 10 are carried at cost. These were acquired more than 30 years ago.
After the stock’s decline this year — prices fell a third versus just 11% for the Hang Seng Index — Shangri-La Asia offers deep value, excluding the likelihood of the asset-light, sponsor-REIT model.
Cheap by historical standards
Shangri-La Asia’s share price compared with its valuation, or weighted value, based on earnings metrics is cheap on three measures. First, we have adjusted the company’s growth in valuation based on revenue, net profit, retained earnings, operating cash flow and free cash flow in order of increasing weight based on 15 years of data. Operating net profit growth of 9.36% over this period implies rising dividends for investors. Also, Shangri-La Asia has consistently reported positive OCF for the past 15 years and, in FY2017, it started reporting positive FCF figures. Chart 2 shows the 1-, 3-, 5-, 10- and 15-year compound annual growth rate of the company’s share price against its weighted value.
Second, we have used a margin of safe- ty analysis to get a discounted NAV. This is simply applying a discount to some balance sheet items. Based on this, Shangri-La Asia’s discounted NAV is around US$1.26, and the current share price is 25% lower than this figure.
Finally, we looked at yields. This is another simple metric. Here, earnings per share, OCF per share, FCF per share and dividends per share are taken as a percent- age of price. The earnings, dividend, OCF and FCF yields are at 6.5%, 2.8%, 13.3% and 3.4% respectively, and lower than the risk-free-rate of 1.4%, represented by the 10-year Hong Kong government bond yield (Shangri-La Asia pays out 50% to 55% of operating net profit in dividends).
In addition, Shangri-La Asia is also cheaper than its traditional peers, trading at 6%, 1% and 80% discounts to regional peers based on price-to-earnings, enterprise value-to-earnings before interest, taxes, depreciation and amortisation (EV/EBITDA) and price-to-book ratios.
Unjustified price decline
Sentiment is poor because occupancy and average room rates at Hong Kong hotels have fallen by double digits y-o-y since the protests began in June. For instance, the occupancy rate for August stands at 63.9% (in Singapore, it is at 88% to 90%). According to STR, which provides hotel data, average daily rates fell 21% to HK$1,086.16, while revenue per available room (RevPar) — which is occupancy times ADR — declined 44.6% y-o-y to HK$694.15.
Historical evidence shows that the Hang Seng Index bounces back after civil protests abate (see Chart 3). This will most likely be the case for the Hang Seng Index and Shangri-La Asia, unless a regional or global financial crisis strikes. Even if that happens, and assuming Shangri-La Asia is forced to liquidate its assets, there is a large margin of safety, given that its asset value at liquidation can go as low as 44.9% for investors to break even on their investments.
Nonetheless, the company faces challenges. Its RevPar in 2HFY2018 slowed sharply because of China, where an oversupply continues to plague the hospitality sector. In addition, in 2HFY2019, currency headwinds could pressure earnings as the reporting currency is in US dollars. Also, the terrorist attack in Colombo in April could pressure Shangri-La Asia’s Sri Lankan revenue. While the company has development projects in the pipeline in China, its focus is likely to be increasingly on management projects, analysts say. Their consensus share price target compiled by Bloomberg is HK$11.55, representing a potential 46.2% upside in share price, with three “buys”, two “holds” and no “sells”.
