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Singapore | REITs

Asia Pacific Equity Research

CDL HOSPITALITY | BUY


MARKET CAP: USD 1.3B AVG DAILY TURNOVER: USD 12M 6 Mar 2011 Company Update

DEVELOPMENT CHARGE HIKE FAVORS INCUMBENTS


Rise in DC greatest for hotels Possible pipeline from CDL unaffected Buoyant hotel demand

BUY (maintain)
Fair value add: 12m dividend forecast versus: Current price 12m total return forecast S$2.00 S$0.12 S$1.72 24%

Biggest DC hikes for hotels The development charge (DC) rates announced on last week saw an average increase of 15% for Hotels. We think this is worth mentioning as the next largest average increase was only 6% (Commercial), all other groups saw no changes, except for the 3% decrease for nonlanded Residential. The DC rate hike rates could have incremental impact on future hotel supply by increasing development costs. As an incumbent with 2.7k rooms in six high-end hotels in Singapore, including Orchard Hotel and Grand Copthorne Waterfront, CDLHT has an edge over potential entrants. The significant DC increase has marginally driven up the replacement cost of hotel rooms and thus would have a positive valuation effect on hotels and also on CDLHT. Possible pipeline from parent CDL As we have identified in our previous report, there are three hotels being developed by City Developments Ltd (CDL) which CDLHT could consider acquiring. These hotels should be opening over 2012 to 2015 and are not subject to the new DC increases. Through this, CDLHT has some cost advantage over other hotel companies which do not have a developer parent or associate that has already gotten provisional permission for the development of new hotels. Hotel demand will outstrip supply We are positive on the long-term prospects of the hospitality sector and believe that this year will set a new visitor arrival record over last years stellar 13.2m (up 13%). We project that hotel room demand will grow at 6.4% p.a. for 2012-2015, easily outpacing an estimated increase in hotel rooms of 3.8% p.a. In terms of supply dynamics, high-end hotels (4-star and above) are well-placed with an estimated increase of only 3.0% p.a. over the same period. Maintain BUY We maintain our BUY rating and our S$2.00 fair value estimate based on a Revalued Net Asset Value (RNAV) analysis. As a liquid counter with an existing supply of high-end hotels, and a developer parent with a potential pipeline unaffected by the new DC hike, CDLHT is well-placed to benefit from the still-growing tourism industry.
Key financial highlights Year Ended Dec 31 (S$m) Gross revenue Total property expenses Net property income Income available for distribution DPU per share (S cents) Cons. EPS (S cts) PER (x) P/NAV (x) ROE (%) Net income margin (%) FY10 122.3 -7.2 115.1 100.7 9.6 na 12.6 1.1 10.2 111.1 FY11 141.1 -5.9 135.2 118.1 11.0 na 9.7 1.1 11.7 124.9 FY12F 154.7 -6.4 148.3 128.2 12.0 11.0 14.6 1.1 7.5 75.8 FY13F 162.7 -6.6 156.1 134.5 12.7 11.1 13.9 1.0 7.8 75.6

Analysts Sarah Ong (Lead) +65 6531 9678 sarahong@ocbc-research.com Kevin Tan +65 6531 9810 kevintan@ocbc-research.com

Key information Market cap. (m) Avg daily turnover (m) Avg daily vol. (m) 52-wk range (S$) Free float (%) Shares o/s. (m) Exchange BBRG ticker Reuters ticker ISIN code GICS Sector GICS Industry Top shareholder S$1,655 / USD1,325 S$15 / USD12 8.7 1.345 - 2.12 67.4 964.8 SGX CDREIT SP CDLT.SI J85 Financials REITs Hospitality Hldgs32.5% 1m 3 0 3m 21 13 12m -8 -8

Relative total return Company (%) STI-adjusted (%) Price performance chart
Shar e Pr i ce (S$ ) 2.21 1.97 1.73 1.49 1.25 1.01 Mar -11 Jun-11 Aug-11
`

Index Level 3400 3020 2640 2260 1880 1500 Nov-11 Feb-12

Fair Value

CDREIT SP

FSSTI

Sources: Bloomberg, OIR estimates

Industry-relative metrics
P er c ent i l e 0t h 25t h 50t h 75t h 100t h

M k t Cap B et a ROE PE PB

Company

I ndust r y A v er age

Note: Industry universe defined as companies under identical GICS classification listed in exchanges in Asia Pacific. Sources: Bloomberg, OIR estimates

Please refer to important disclosures at the back of this document.

MITA No. 019/06/2011

OCBC Investment Research Singapore Equities

Development charge hike highest for hotels. The new development charge rate recently set on 29 February and starting from 1 March saw an increase of 15% for Hotels (grouped together with Hospitals). This is the largest increase among all the different land use groups. The rate increase will likely raise the cost of new hotel developments that have not yet received provisional permission from the URA. This may deter supply or reduce the competitiveness of such hotels after they are built.
Exhibit 1: Hotels face largest development charge increase
Land use group Average DC rate per sqm of GFA (S$) Commercial Landed Residential Non-landed Residential Hotels / Hospitals Industrial Average change vs prev. revision (%) Commercial Landed Residential Non-landed Residential Hotels / Hospitals Industrial Source: URA, OIR Note: The average DC rates are calculated as a simple average of the DC rate applied in each of the 118 geographical sectors. "Average change vs previous revision" refers to an average of the percentage changes in each of the 118 grographical sectors. -4.4% 0.0% -15.3% -9.6% 0.0% -3.9% 0.0% -1.7% -4.3% 0.0% -1.6% 12.5% 8.5% 0.1% 0.0% 0.6% 12.9% 12.7% 0.0% 10.0% 12.7% 18.4% 10.6% 26.7% 8.3% 21.7% 16.5% 12.2% 7.0% 30.9% 5.6% 0.0% -3.0% 14.9% 0.0% 3,431 2,532 4,233 2,684 567 3,252 2,532 4,122 2,525 567 3,169 2,857 4,473 2,529 567 3,189 3,225 5,036 2,529 624 3,606 3,823 5,563 3,238 675 4,380 4,402 6,200 3,485 885 4,570 4,402 5,982 3,924 885 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12

We have a rough estimate that the DC rise could result in an increase of the cost of developing new hotels by ~0.9%, assuming that 25% of a development is new build-up. This would imply that the value of current hotel stock should increase by approximately the same magnitude.
Exhibit 2: Example of effect of DC increase rise on new hotel developments
Parameters Asummptions % of new development that is additional build-up Original cost of developing hotel/number of rooms Total GFA (m2) of hotel/number of rooms Average new DC (S$/m ) Average original DC (S$/m ) Approximate change in DC (S$/m2) Calculations Increase in cost for new development % increase in cost for new development Source: OIR estimates =25%*30*439 =S$3,293 =S$3,293/S$350,000 =0.9%
2 2

25% S$350k 30 3,924 3,485 439

Pipeline from parent CDL not affected by hike. With a gross gearing of 25.2%, CDLHT has ~S$520m in debt headroom to finance yieldaccretive acquisitions. It hopes to target one to two acquisitions per year for this year and next. In Singapore, parent CDL has a pipeline of hotels coming on-stream in 2013-2015, and one or more of these may become acquisition targets.

OCBC Investment Research Singapore Equities

Exhibit 3: Potential hotels from parent City Developments Ltd


Project Name W HOTEL SENTOSA COVE ROBERTSON QUAY SOUTH BEACH Est. Opening Aug-12 2014 2015 No. of Rooms 240 310 701 Possible cost (S$m), assuming $500k/room -$800k/room 120-216 155-279 351-631

Sources: Company, CDL, CBRE, Horwath HTL, OIR estimates Note: Cost per room would be depend partly on the land's tenure.

We note that the cost of developing these hotels will not be affected by the DC rate increase. This implies some possible advantage for CDLHT versus many other hotel companies that do not have a developer parent/associate which is already developing a pipeline of hotels. Healthy demand growth will outstrip supply for hotel industry. Given that ~80% of CDLHTs revenues come from Singapore, the key driver for CDLHTs performance will be the performance of the local hotel industry. The hospitality sector is actively supported by the government and the Singapore Tourism Board (STB) has a target of 17m annual visitor arrivals by 2015, up from 13.2m in 2011. We believe that hotel room demand will grow at a CAGR of 6.4%, outstripping overall supply increases (CAGR: 3.8%) for 2012-2015. The new DC hike may slightly dampen the growth in supply. Based on our in-house database, high-end hotels (4-star and above) are better positioned in terms of oncoming supply, with an estimated room supply 3.0% increase p.a. for 2012-2015 versus a 5.6% CAGR for budget hotels. CDLHT, having six high-end hotels in Singapore that total 2.7k rooms, is in the better positioned sub-sector of the hotel space.
Exhibit 4: Slower room growth for high-end hotels versus budget hotels
Project Name Budget Budget YoY High-end High-end YoY All Hotels All YoY

EST. NUMBER OF HOTELS END 2011 237 71 308 END 2012 242 2.1% 75 5.6% 317 END 2013 247 2.1% 79 5.3% 326 END 2014 250 1.2% 84 6.3% 334 END 2015 250 0.0% 85 1.2% 335 EST. TOTAL ROOM SUPPLY END 2011 15.0k 33.1k 48.1k END 2012 16.0k 6.9% 34.0k 2.5% 50.0k END 2013 17.1k 6.5% 35.2k 3.8% 52.3k END 2014 18.6k 9.2% 36.6k 3.8% 55.2k END 2015 18.6k 0.0% 37.3k 1.9% 55.9k CAGR (2011-2015) 5.6% 3.0% Sources: URA, STB, CBRE, Horwath HTL, OIR estimates Notes: Hotels refers to all registered hotels, including backpackers' inns. A few hotel-equivalent properties are also included. Properties that serve primarily as serviced apartments are excluded.

2.9% 2.8% 2.5% 0.3%

3.9% 4.6% 5.5% 1.3% 3.8%

OCBC Investment Research Singapore Equities

Exhibit 5: Future hotel supply


Expected Opening 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2012 2013 2013 2013 2013 2013 Proposed Hotel Projects Location Estimated Type Budget Budget Budget Budget Budget Budget Budget Cavenagh Road Sentosa Sentosa Resorts World Sentosa (West Zone) The Quayside Isle (Sentosa Cove) Changi Business Park Avenue 1 Changi Business Park Avenue 1 Geylang Jalan Besar Bideford Road High-tier High-tier High-tier High-tier Budget Budget Budget Budget Budget No. of Rooms 363 186 405 86 100 285 -390 333 61 210 240 251 313 100 160 221 1,035 844 1,879 Budget Room Total High-end Rooms Total Rooms Total

PARKROYAL @ CBD Hotel (to be named) by HG Properties Days Inn Aqueens Hotel Jalan Besar Aqueen Hotel Paya Lebar Dorsett Regency Hotel Hotel Grand Central Redevelopment The Bay Hotel Movenpick Hotel Equarius Hotel/Spa Villas W Singapore Sentosa Cove UE BizHub East Modena (part of Changi City) Aqueen Hotel Geylang Aqueen Hotel Tyrwhitt Holiday Inn Express Singapore Orchard Road (former Wellington building) Traders Hotel (Redevelopment of Hotel Phoenix) One Farrer (part of Connexion) Hotel (to be named) Sofitel So Singapore Holiday Inn Express brand hotel Ramada Singapore Hotel (to be named) by Hotel Grand Central The Westin Singapore Capitol Laguna Hotel Hotel (to be named) by Far East Soho Hotel (to be named) by City Developments Ltd Hotel (to be named) by South Beach, JV of CDL

Upper Pickering Street Fairy Hill Point Balestier Road Jalan Besar Paya Lebar New Bridge Road

2013 2013 2013 2013 2014 2014 2014 2014 2014 2014 2014 2014 2015

Orchard Road Farrer Park Station Road Tanjong Pagar Road/Gopeng Street Robinson Road/Boon Tat Street Clemenceau Avenue/Havelock Road Balestier Road Cavenagh Road Asia Square Tower 2 (Marina View Parcel B) Stamford Road/North Bridge Road Laguna Golf Green Peak Seah Street Robertson Quay Beach Road

High-tier High-tier High-tier High-tier Budget Budget Budget High-tier High-tier High-tier High-tier High-tier High-tier

525 230 387 135 446 391 728 305 182 191 340 310 701 1,565 3,645 1,328 701 4,150 2,893 701 7,795 1,045 1,277 2,322

2012-2015 Total: Sources: URA, CBRE, Horwath HTL, OIR estimates

BUY CDLHT well-positioned hotel play. We maintain our BUY rating and fair value estimate of S$2.00 based on an RNAV analysis. Possible upside catalysts would be acquisitions. The new development charge hike increases the value of existing hotel stock and enhances the incumbents advantage of CDLHT over additional future supply. There is a pipeline of three hotels that it could acquire from its parent which are not directly affected by the DC hike. Moreover, CDLHT is in the high-end hotel space, which we believe has better supply-side dynamics than budget hotels.

OCBC Investment Research Singapore Equities

Company financial highlights

Income statement Year Ended Dec 31 (S$m) Gross revenue Total property expenses Net property income Net finance costs Manager's management fees Other expenses Net income bef. revaluation Revaluation gain on invstmt properties Total return after taxation Income available for distribution

FY10 122.3 -7.2 115.1 -16.6 -10.2 -1.4 86.9 51.4 135.9 100.7

FY11 141.1 -5.9 135.2 -13.2 -11.7 -2.8 107.6 73.2 176.3 118.1

FY12F 154.7 -6.4 148.3 -15.3 -12.7 -3.0 117.2 0.0 117.2 128.2

FY13F 162.7 -6.6 156.1 -16.7 -13.3 -3.2 123.0 0.0 123.0 134.5

Balance sheet As at Dec 31 (S$m) Investment properties Properties under development Cash (including restricted cash) Total current assets Total assets Current liabilities ex debt Debt Total liabilities Unitholders' funds Total equity and liabilities

FY10 1,787.1 0.0 67.8 82.7 1,869.9 21.8 381.1 409.7 1,460.2 1,869.9

FY11 2,029.8 0.0 70.5 88.5 2,118.5 23.6 534.8 570.8 1,547.7 2,118.5

FY12F 2,029.8 0.0 82.9 102.7 2,132.6 25.8 534.8 574.2 1,558.4 2,132.6

FY13F 2,029.8 0.0 93.8 114.6 2,144.5 27.2 534.8 576.3 1,568.2 2,144.5

Cash flow statement Year Ended Dec 31 (S$m) Net income of H-REIT Adjustments Operating income before working cap chgs Change in working capital Cash flow from operating activities Cash flow from investing activities Cash flow from financing activities Change in cash Cash at beginning of period Cash at end of period

FY10 138.3 -26.7 111.6 4.7 116.3 -244.4 190.2 62.1 5.7 67.7

FY11 180.8 -49.2 131.6 -0.9 131.1 -166.2 37.8 2.7 67.7 70.5

FY12F 117.2 25.6 142.8 0.5 143.2 -11.1 -119.8 12.4 70.5 82.9

FY13F 123.0 27.5 150.4 0.3 150.7 -10.7 -129.1 10.9 82.9 93.8

Key rates & ratios DPU per share (S cents) NAV per share (S$) PER (x) P/NAV (x) NPI margin (%) Net income margin (%) Gross gearing (%) DPU yield (%) ROE (%) ROA (%) Sources: Company, OIR forecasts

FY10 9.6 1.5 12.7 1.1 94.1 111.1 20.4 5.6 10.2 8.0

FY11 11.0 1.6 9.8 1.1 95.8 124.9 25.2 6.4 11.7 8.8

FY12F 12.0 1.6 14.7 1.1 95.9 75.8 25.1 7.0 7.5 5.5

FY13F 12.7 1.6 14.0 1.1 95.9 75.6 24.9 7.4 7.9 5.8

Company financial highlights

OCBC Investment Research Singapore Equities

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