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Can Shangri-La Asia Limited Grow in the Years Ahead?

Jeremy Chia

Shangri-La Asia Limited (SGX: S07) is the holding company that owns and manages the chain of hotels under the Shangri-La brand name. Besides its hotel operations, the group also owns investment properties and develops properties for sale.

Shangri-La Asia, which is majority-owned by Malaysia’s richest man, Robert Kwok through various companies, owns 79 hotels, leases three hotels and manages another 20 hotels for third party owners. In the first half of 2019, Shangri-La Asia’s revenue inched up 1.7%, but profit from operation attributable to owners fell 20.1%. Its revenue from its hotel properties fell 5.1% due to foreign exchange impact and a decrease in revenue per available room on the back of lower occupancy and lower room rate.

Its hotel business in China fared poorly as hotel revenue fell 8.4% or 2.9% in constant currency terms. The ongoing trade war and weakening Chinese yuan have had a material impact on the group’s bottom-line.

Despite the poor headline numbers and near-term challenges, the hotel group could return to growth in the longer term. Here’s why.

Properties under development

On top of the 79 hotel properties that it has a stake in and three properties it currently leases, Shangri-La Asia also has a stake (between 40 and 100%) in five more hotel properties which are currently under development.

Four of these properties will be operated under the Shangri-La Hotels brand, while one will be operated under the Traders Hotels brand. These properties are expected to be opened between the fourth quarter of 2019 and 2023.

The new properties, once completed, will add to the group’s top-line and hopefully be earnings-accretive later in the future.

Secured 10 more management contracts

The hotel management segment also has 10 more management contracts in the pipeline. Nine of these will be under the Shangri-La brand, with one under the Hotel Jen brand name.

With the 10 pipeline contracts, the total number of hotels managed for third party owners will increase by 50% to 30.

The Foolish bottom line

The challenges facing Shangri-La Asia in the first half of 2019 will most likely persist over the coming quarters. Recently, the US-China trade war took another turn for the worse, while Hong Kong’s political unrest is dragging and shows no signs of resolving. These problems will continue to be a drag on Shangri-La’s business.

However, investors can take heart that there are visible revenue and profit drivers on the horizon.

The group is also in a fairly safe financial position, with a net debt-to-asset ratio of 0.68. This is manageable for the group’s asset-heavy business, whereby it owns a sizeable number of the hotels it operates.

At the time of writing, shares of Shangri-La Asia sport a price-to-earnings ratio of 16.8 and have a trailing dividend yield of 2.5%.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Jeremy Chia doesn’t own shares in any companies mentioned.

Motley Fool Singapore 2019