Investors check into Shangri-La

With Asia growth forecast to pick up, occupancy rates should return to pre-Sars levels by the fourth quarter

Few sectors were battered more comprehensively by the Sars outbreak than tourism. As fears of the virus spread across Asia, hotel revenues got hammered as occupancy rates plummeted.

Now the tempest has passed and as hotel rooms slowly refill, analysts are cautiously optimistic on the prospects of Shangri-La Asia, which owns or manages more than 35 hotels and resorts around the region.

The company's share price slid to 18-month lows in April before scrambling back up to Friday's close of $5.70. Market watchers want to know where it will go from here.

'Going forward the fundamentals for the hotels will improve,' said Mohan Singh, an analyst at BNP Paribas.

He said at the peak of the Sars outbreak occupancy rates were about 10 per cent or lower, but have since bounced back to 30 to 40 per cent.

He said by the fourth quarter, occupancy rates should be back to pre-Sars levels.

Mr Singh said if investors take the view that the world economy will remain stable, then Asian trade should increase, meaning more business travel and better prospects for Hong Kong and mainland hotels.

UBS analyst Eric Wong said Shangri-La's strength was its focus on the broader Asia region. He said competitors such as the Mandarin Group and Hongkong & Shanghai Hotels would experience slower growth next year because they were limited in focus.

Mr Wong said 3 per cent growth for the US next year would equal 5 to 6 per cent growth in Asia. He said continued interest in China gave Shangri-La an advantage over its peers, as the group had a strong presence on the mainland.

Shangri-La owns 17 hotels in China that accounted for 31.13 per cent of group turnover of US$600 million last year. Its two Hong Kong hotels contributed 23.61 per cent of revenue.

Mr Wong said Shangri-La achieved a 28 per cent rise in profit last year despite the slowdown in global travel.

He said the company had also achieved an 8 per cent rise in 'revpar' - or revenue per available room - this year before Sars compared with a 2.7 per cent drop in the US, further adding to the bull case now the outbreak has passed. He has a 'buy' recommendation on the stock and a price target of $6.10.

Mr Singh said Shangri-La - which like the South China Morning Post has the Kerry Group as a parent - was trading at 16 to 17 times next year's expected earnings, and had an 'outperform' rating on the stock.

In the past couple of years, in addition to the properties it owns and runs, Shangri-La has increased its focus on hotel management contracts, recently acquiring deals to run hotels in the Middle East, the Maldives and Sydney.

'Going forward, it will help return on assets, which has been quite low compared to other industries,' Mr Singh said.

'On the revenue side the management fees are extra income without too many costs involved.'

Shangri-La plans to add 15 new hotels - a 27 per cent increase in rooms, two-thirds of which are in China - by 2006.

Mr Wong said 11 of the 15 new projects are management contracts whereby Shangri-La commits no capital and can reap returns immediately. He added that Shangri-La's strategy of moving into management contracts left them less as risk from the kind of unexpected problems that have beset Asia in recent times.

But Celestial Asia Securities research head Herbert Lau Chung-kwan said he was still very cautious on Sars-affected stocks.

'These companies have recovered but not enough,' he said. 'Tourist spending is still way down from last year and occupancy remains low. Tourists won't come back quickly.'

Mr Lau said there were many other companies offering better returns more quickly with lower risk.

'These companies have recovered but not enough. Tourist spending is still way down from last year and occupancy remains low. Tourists won't come back quickly.'