Sector Outlook: Recovery not over
- Post-COVID recovery of inbound tourism is half-way through and progressing unevenly
- Hotel RevPAR expected to surpass pre-COVID level in 2024
- Hotel room growth virtually non-existent
- BUY Far East Consortium (35 HK), Regal REIT (1881 HK) & Langham Hospitality Investment (1270 HK) for attractive valuations
Post-COVID recovery of inbound tourism is half-way through and progressing unevenly partly due to flight capacity constraints. In 11M23, Mainland Chinese tourist arrivals have rebounded to 51.9% of pre-COVID levels, and compares favourably with non-Chinese tourists. Short haul markets exhibited stronger recovery than long haul counterparts. Among short haul markets, Southeast Asia notably outperformed North Asia in terms of recovery. With continued recovery in flight capacity, we project visitor arrivals to grow by another 20-25% in 2024.
Tourist spending more on hotel accommodation. Overnight visitors showed stronger recovery than day-trippers in a post-COVID era. Moreover, they spent more on hotel accommodation on average when compared to pre-COVID times, Mainland tourists in particular. This should underpin strong post pandemic recovery of the hotel sector. Hotel RevPAR rebounded 62% in 11M23, equivalent to 91% of the level in 11M18. This was led by High Tariff A hotels (five-star rated hotels) which saw their room rates surpassing pre-COVID levels. We project hotel RevPAR to rise by 10-15% in 2024 to exceed pre-COVID level.
Hotel room growth virtually non-existent. We forecast hotel room inventory to rise at a 3-year CAGR of only 1% in 2023-26. With virtually no new hotel investments made during COVID, new hotel room growth should taper off after 2026. Moreover, some hotels are being converted into student residence or redeveloped into residential use. This would reduce hotel rooms available for tourists in future years.
Stock recommendation. Far East Consortium is seeing remarkable benefits from ongoing hotel sector recovery. The upcoming opening of Dorsett Kai Tak should add momentum to its hotel earnings expansion. BUY with HK$2.0 TP. Following the heavy sell-off, long-term value of Regal REIT is surfacing. We recommend to BUY on Langham Hospitality Investment which offers distribution yields of >12% for FY24.
