Monday, January 2, 2012
Shangri-La Hotels -- Solid investment but no rush
Companies own by Robert Kuok are usually well run. His conservatism and down to earth leadership has strong root that can weather all kind of business conditions, especially cyclical ones.
Hotel business is cyclical in nature. This business can tell us a lot about the global economic boom and bust story. It's a place people conduct businesses to make a lot of money or to indulge themselves after making a lot of money. Keyword: a lot of money = boom. It's also a place many people will desert licking their wounds or get quarantine in their office in bad times. Deserted = bust! There are three bold lines that will tell it all.
The first line reminded us a lot about dot.com bust, 9-11, SARS, etc. Those were the truly difficult times. Right after 2004, the world has unprecedented global economic growth without realizing it would come to an abrupt end. Thank you Greenspan.
The second bold line told a story of the US housing bubble bust that led the world into recession and financial crisis. After the market bottomed out in 2009, everything looks fine for the last one and the half year. Thank you chairman Bernanke.
A little warning. Shangri-La stock price peaked out in October 2010 and has been in a down-trend for more than a year. This is the story of the third bold line but not sure who to thank.
The EPS trend is more or less telling the same story of the price chart. The world went out from the soft patch in 2003 and enjoying a nice long period of 4 to 5 years of prosperity. A little second warning. The yellow light is flashing, again. The earning appears to have peaked out in 2010.
To understand Shangri-La business, we need to understand two drivers. First, Shangri-La operates a group hotels, resorts and property management in Malaysia. In 2010, it had a total revenue of RM 422 million. The breakdown of revenue contributions can be found here.
Three of Shang's hotels contributing almost three-quarter to the group's revenue. The data point of occupancy rate is a contrarian indicator. No good times(2004-2007) or bad times(2001-2003) are going to last forever.
The occupancy rate in the first 9 months of 2011 is very high. Taking comfort in this lagging data is certainly not wise. The typical business segment of Shangri-La hotels like Shangri-La Kuala Lumpur and Traders Penang occupancy rates are very high. 70% occupancy of Shangri-La Kuala Lumpur is as high as 2004 - 2007 period. The Traders hotel's occupancy rate is even unusual, 85%, a new record for the last ten years. Do you think this is going to be sustainable?
On the resorts side of the business, first it will get hit by Rasa Ria because they are renovating and secondly a lot of their clients are Europeans and Aussies followed by Asians from the North.
The rest, Rasa Sayang and Golden Sands, look reasonable.
All in all, I would expect earnings of Shangri-La group to soften in anticipation of lower business volume and slower resort business. This is not a bad news to me because a well run business that being oversold at the bottom of the cycle is a good investment.