Shangri La Asia: Cost-cutting in place but prospects remain bleak
Hong Kong-listed Shangri-La Asia’s principle activities and business segments include hotel properties and operations, investment properties, and property development for sale. To recap, Shangri-La, controlled by the billionaire Kuok family, owns and manages hotels under four brands, which are Shangri-La Hotels and Resorts, Kerry Hotels, Hotel Jen and Traders Hotels. The geographical exposure of its assets and revenue mostly comes from China at around 40%, followed by Singapore and Hong Kong at roughly 10% each. Shangri-La, which has a secondary listing on the Singapore Exchange, performed poorly among our top 10 stocks picks with a 14.5% loss for a six-month period and slightly underperformed the other two benchmark indices, the Hang Seng and MSCI Hong Kong, which lost 10.6% and 10.1% respectively.
Unsurprisingly, Covid-19 has hurt the company, as various governments imposed travel restrictions, social-distancing measures in a bid to curb the pandemic. Shangri-La also issued a statement earlier this month that it may report a loss for its 1HFY2020 ending June 30, due to the severe business disruption. The company said that particularly for the months of March and April, Shangri-La’s effective share of revenue decreased by almost 80% when compared to its monthly average share of revenue for 2019.
Shangri- La reported its FY2019 results ended Dec 31, 2019, in March. Compared to FY2018, Shangri-La’s revenue, Ebitda and EPS dropped 3.4%, 12.1% and 20.9% respectively. Despite the underwhelming set of results, the company remains in a decently healthy financial position, with a current ratio of 1.2 times and debt-to-equity ratio of 76.2%. The company also opted to not pay the final dividends for FY2019, leaving only the 8 HK cents interim dividend for the year, which translates to a measly 1.2% dividend yield.
Moving forward, the company has focused its attention on dealing with the pandemic over the short term. The company implemented cost-cutting measures in February in China and was able to lower operating costs by approximately 50% during this month. Subsequently, for March and April, Shangri-La implemented similar cost-cutting measures in other regions. These measures also include voluntary cost-cutting measures from employees, management and directors through no-pay leave, wage reduction and fee reduction for a period of time. These measures may help mitigate some of the pandemic’s impact to the business over the short term, but sustainable recovery is still very uncertain which implies that company may also report a loss for its FY2020.
Analysts have given a 12-month target price of HK$6.60 ($1.18), which is only marginally higher than the current trading price of HK$ 6.50. There are three “buy” calls, one “hold” call and no “sell” calls. As at Dec 31, 2019, the company’s net asset value was US$1.73 per share, or HK$13.41. This means the share price now at slightly less than half its book value. However, without a significant corporate action, sentiment is likely to be negative on this stock. We think that Shangri-La’s six months prospects are rather grim even with cost-cutting measures, and hence believe that the company is fairly valued over this period. E