Investment Merits

• Hotels’ performance has a positive correlation to that of Malaysia’s tourism industry
• Tourism Malaysia aims to achieve a 36% YoY growth in tourist arrivals
• Banqueting and events to drive F&B revenue
• Resumption of dividend payouts

Company Profile

Incorporated in 1971, Shangri-La Hotels (Malaysia) (SHMB) owns and operates luxury hotels and resorts in Malaysia. It operates in the luxury hospitality segment, catering to both leisure and business travellers. The company offers premium services, elegant accommodations, and a range of amenities such as fine dining, spa facilities, and event spaces. The group’s hotel properties are Shangri-La Hotel Kuala Lumpur, Shangri-La Rasa Ria Resort & Spa (Kota Kinabalu, Sabah), Shangri-La Rasa Sayang Resort & Spa (Batu Ferringhi, Penang), Golden Sands Resort (Batu Ferringhi, Penang) and JEN Penang Georgetown, along with an 18-hole championship golf course and a clubhouse in Pantai Dalit, Tuaran, Sabah.

Highlights

Influx of tourists ignites recovery in hotels’ occupancy rates. Malaysia was the only South-East Asian country with tourism numbers that exceeded pre-COVID-19 levels in 2023. It became the most popular destination in South-East Asia last year, thereby dethroning Thailand. SHMB’s hotels and resorts rely heavily on international tourists for both leisure and business travel. As such, its hotel occupancy rate rose to 63% in FY23, from 17.4% in FY21 – an increase that was largely due to the resurgence in tourism. Tourism Malaysia has set a target to achieve a 36% YoY growth in foreign tourist arrivals in 2024, supported by increased flights and intensified tourism promotion activities. Foreign visitor arrivals have been further boosted by the commencement of visafree entry for China nationals, as Malaysia targets to welcome 200k China tourists per month in 2024, from 158.3k in Sep 2023. This particularly benefits SHMB’s under-occupied Rasa Ria Resort & Spa, which was historically popular with China tourists. Hence, we expect SHMB's overall hotel occupancy rate to recover to the pre-pandemic level of 70% in FY24.

Strong demand drives up hotel rates. A weaker MYR not only makes Malaysia an attractive destination for travellers, it also boosts their spending power – which should be a boon for renowned hospitality brands like Shangri-La Hotels. Traditionally, SHMB has a seasonal peak in 3Q – which coincides with the summer holidays in Europe. We anticipate its 1Q24 to be strong, due to the Lunar New Year (CNY) celebrations and long school holidays (9 Feb-9 Mar). Inbound travel surged by 53.9% YoY over CNY 2024, according to Trip.com. Also, the surge in tourist expenses per capita and hotel demand should drive up hotel room rates – and offset the group’s rising labour and electricity costs.

Banqueting and events to lift F&B revenue. Post-pandemic in 2022, increased banqueting and events from meetings and conferences as well as wedding packages have significantly stimulated its hotels’ F&B business (over 40% of total revenue). The pent-up demand for wedding packages in Shangri-La Hotels is expected to continue, especially during the auspicious Year of the Dragon in 2024, as the zodiac animal symbolises strength and prosperity in Chinese culture.

Company Report Card

Results highlights. SHMB has seen a robust recovery in its business operations from 2022 onwards, especially with the gradual reopening of country borders and relaxation of travel restrictions. In 2023, its revenue rose by 39% to MYR503.7m from MYR36.4m in 2022. This substantial growth propelled the group out of the red, transitioning to a net profit of MYR34.1m in 2023 from a net loss of MYR19.7m in 2022. In 2022-2023, its overall hotel occupancy rate saw a notable increase, rising from 48.6% to 63%.

Improving balance sheet. As at 31 Dec 2023, SHMB has a healthy balance sheet with a net gearing ratio of 0.03x – which points to a substantial improvement from 0.12x in end-FY21.

Dividends. Although there is no dividend policy, SHMB has been consistently paying dividends of >90% of earnings from FY17 to FY19, until it incurred losses. With the resurgence in profitability by FY23, dividend payments resumed – and a DPS of MYR0.07 was declared in 2023.

Management. SHMB is helmed by Managing Director Christopher Phong Siew San, who is responsible for overseeing the overall operational functions of the group. He is supported by the senior management team, which comprises individuals with outstanding professional qualifications and over 20 years of experience in their respective fields.

Investment Case

Benefit from tourism revival. Government initiatives such as Visit Malaysia Year 2026, a MYR350m allocation from Budget 2024 to revive tourism, and visa-free entry for China and India tourists, coupled with a weakened MYR should drive tourist arrivals and spending. This, hence, would benefit luxury hotel chains like SHMB. Robust demand for banqueting and events would further boost revenue. We expect its topline to recover to pre-COVID-19 levels this year.

In line with the 10-year P/E mean (includes the pre-COVID-19 period) of 26.9x and 2-year forward P/E of international peers, we ascribe 25-28x P/E on FY25F earnings to derive a FV range of MYR3.56-3.99. The resumption of its dividend payouts is another plus point.

Key risks include competition risk, a downturn in Malaysia’s tourism sector, and travel restrictions being re-imposed.

Source: RHB Securities Research - 15 May 2024