HOTEL INDUSTRY

Stocks News Friday February 9, 2018 10:30 —TRIS News Release

TRIS Rating holds a positive outlook for the hotel industry. Thailand remains a world class tourist destination. Tourism has been a key growth driver for the Thai economy for over a decade. The number of tourist arrivals in Thailand has grown consistently. Despite several event risks, the industry has been proven to quickly recover within a few quarters.

The number of tourist arrivals is expected to increase, especially Chinese tourists. However, the competitive environment among hoteliers is expected to be intense due to a rise in lodging supply. The diversification in terms of geography and customer profile will help smooth the operational and financial performance of hotel operators. In addition, some operators expand to other businesses such as food services or real estate development, which also help secure additional sources of income.

KEY FACTORS

• Rising number of tourists

In 2016, the number of tourist arrivals in Thailand reached 32.5 million persons, an 8.7% increase from the level in 2015. The number of foreign tourists in 2017 rose moderately to 35.4 million persons, up by 8.8%.

TRIS Rating expects that the number of tourist arrivals will keep rising for several reasons. Chinese tourists, the largest share of tourist arrivals into Thailand, are expected to increase in line with the new direct flight routes from China to many popular Thailand destinations. Moreover, the economic recovery worldwide supports a rising number of tourists from other key countries such as Russia, South Korea, and Japan.

Domestic tourism is expected to continue to expand. Receipts from the Thai tourists increased by 5.4% to Bt930 billion in 2017. The Department of Tourism (DOT) forecasts receipts from the Thai tourists will grow by 8.2% in 2018. The Cabinet approved tax breaks for tourism spending in secondary provinces from 1 January to 31 December 2018. The tax breaks will be offered to individual tourists who spend on accommodations and corporations that organize seminars in these second-tier provinces. Each tourist can claim a tax deduction of up to Bt15,000 while corporations can claim up to 100% of the cost of their seminars.

• Increasing lodging supply

The bright industry prospects are attracting new entrants to the market. Economy and midscale segments have lower barriers to entry than luxury and large-scale properties. Thus, competition among lodging operators is quite intense, especially in the economy and midscale segments. According to the Tourism Authority of Thailand (TAT), the number of available rooms in Thailand is continually rising. The lodging supply increased from 511,023 rooms in 2014 to 729,658 rooms in January 2018. The number of rooms grew especially fast in small- to medium-sized properties such as resorts, serviced apartments, and guesthouses.

• Improving occupancy rate and revenue per available room

During 2017, hoteliers benefited from the rise of tourists which in turn increased occupancy rates (OR) and the average revenue per available room (RevPar). The average OR of lodgings in Thailand during January to November 2017 was 68%, growing by 2.4% compared with the same period in 2016. The highest OR was in the central region at 73.3%, followed by 69% in the southern region.

The average RevPar earned by hoteliers rose to Bt1,099 per night nationwide, up by 13.6% during the first 11 months of 2017. The southern region still had the highest RevPar at Bt1,534 per night in the first 11 months of 2017. The central region ranked second, with RevPar at Bt1,154 per night. RevPar in the northern and northeastern regions was at Bt647 per night and Bt457 per night, respectively.

TRIS Rating believes that the tax breaks approved by the Cabinet will stimulate domestic tourism. The tax breaks will encourage Thai tourists to travel to secondary provinces. This will further improve the OR and RevPar in 2018.

FINANCIAL HIGHLIGHTS
• Despite positive tourism momentum, intense competition depressed returns of hoteliers
Robust tourism was a key driver for hoteliers’ returns, however, hoteliers’ profits rated by TRIS Rating in the first nine months of 2017 were mixed. The operating margin, defined as the margin before depreciation and amortization, of Minor International PLC (MINT) was at 16.4% in the first nine months of 2017, from 14.9% in 2016. A strong performance from the hotel segment, an adjustment to the Anatara Vacation Club sales model, and growth in the retail trading and contract manufacturing segment offset weaker performance in the restaurant segment.
The average RevPar across MINT’s properties during the first nine months of 2017 was flat, at Bt3,814 per night, due to the lower RevPar of its new hotels. However, MINT achieved organic growth of 2.9% in RevPar during the first nine months of 2017. RevPar at MINT’s portfolio in Thailand increased to Bt3,777 per night, up by 6.7% year-on-year (y-o-y).
The operating margin of Central Plaza Hotel PLC (CENTEL) slipped from 22.4% in 2016 to 21.8% in the first nine months of 2017. The softer performance was mainly from the hotel segment. The average RevPar of CENTEL’s hotel portfolio rose marginally to Bt4,017 per night. The lower average RevPar came from the hotels in Bangkok and the Maldives due to fierce competition among hoteliers. The food segment was able to maintain its margin through the expansion of outlet networks.
Dusit Thani PLC (DTC) reported a drop in operating margin from 14% in 2016 to 10.8% in the first nine months of 2017. The drop was due to a lower number of guests in Dusit Thaini Hua Hin, the renovation of three hotels in Phuket, Pattaya, and Manila, a decrease in food and beverage revenues, and recognition of its share of net losses from investments by the equity method. Moreover, the selling and administrative expenses of DTC in the first nine months of 2017 rose by 5.5% owing to high legal and financial advisory fees from its mixed-use projects and other projects.
• Leverage level improved for most of hoteliers
Leverage level of most hotel operators rated by TRIS Rating improved. The debt to capitalization ratio of MINT strengthened from 57.5% in 2016 to 56.4% in the first nine months of 2017 because of solid performance, partly from its hotel segment. CENTEL’s leverage also improved from 41.1% in 2016 to 37.7% in the first nine months of 2017. This mainly came from effective debt management together with tax privileges from the establishment of its international headquarters. DTC keeps its debt to capitalization ratio below 30%, reflecting a conservative financial policy. DTC’s debt to capitalization ratio weakened from 23.9% in 2016 to 24.2% in the first nine months of 2017. The weaker performance was due to an increase in non-liabilities of rental deposits from the mixed-use project.
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