Travel was a $1,500,000,000,000 industry until it was decimated by Covid-19.
From airlines to tour groups, businesses were reeling in shock and are trying their best to survive now.
We can agree that travel will come back because we have innate curiosity and desire to explore other parts of the world.
The question is when would travel be back?
No one knows but it is quite evident that we should put off the thought of travelling for the rest of this year.
That said, you shouldn’t wait if you want to invest in the recovery of the travel sector. The share prices would have recovered by the time the situation is certain. It would be too late by then. You have to make a bet now.
Personally, I would prefer hotels over airlines for a travel recovery play. Airplanes are expensive to maintain and suffer from high rates of depreciation. Hotels on the other hand are simpler. Real estate holds value well and buildings are easier to maintain than aircraft.
Understanding Hotel Segments
There are four main segments of hotels:
- Luxury
- Upscale
- Mid-tier
- Economy
Each segment serves a different clientele and a target market.
The luxury hotels serve the top 10 per cent in the world. The rich and powerful. They can be your politicians, diplomats, business leaders, movie stars, and pop stars. Examples of luxury hotel brands are Ritz Carlton and Shangri-la.
The upscale segment mainly focuses on business travellers. They would often attend meetings and events in conference rooms within the same hotel. Examples of upscale hotel brands are Marriott and Hilton.
Mid-tier hotel segments include larger hotels with many rooms that can accommodate tour groups. The rooms are of a lower quality as compared to upscale hotels and hence, they charge lower rates. Examples of mid-tier hotel brands are Best Western and Holiday Inn.
Economy hotels tend to be hostels and backpacker inns. They cater for the most budget conscious travellers.
The Airbnb disruption
Besides facing short term pressures from Covid-19, the hospitality sector has had to content with the long term threat from Airbnb’s disruption.
I believe Airbnb will deliver the biggest impact to economy and mid-tier hotels. Budget travellers who stay in backpacker inns are more adventurous and Airbnb is better positioned to offer similar or better experiences, without much increment in prices. Mid-tier hotels would still enjoy businesses from the tour groups as Airbnb aren’t suitable to house a large group of people. But small groups of travellers (couples or a family) are more likely to opt for Airbnb because they can get an entire apartment for themselves, at cheaper rates. The Business travellers, the rich and the powerful are unlikely to go for Airbnb because they prefer convenience, privacy and security.
In terms of recovery, I believe that business travel should see improvements since it is deemed more necessary than leisure travel to keep the economy humming. Even if leisure travel is allowed, individuals may remain cautious and choose not travel to minimise the risk of infection.
The Luxury segment may suffer at the moment because concerts are not coming back anytime soon and political events are being postponed too. Hence, I believe the best bet for recovery would be in the upscale segment.
Occupancy rates by segment in Singapore
Hotels in Singapore have always enjoyed high occupancy rates (above 80%). But Covid-19 changed all that. Occupancy rates tanked by 50% in Feb 2020 and worsen in Mar and Apr 2020.
The Singapore Government utilised some of these hotels to quarantine travellers and this move has helped to improve the occupancy rates.
I’ve plotted the trends below and luxury is the segment that sees much lower occupancy rates compared to the other 3 segments.
Average room rates and RevPAR by segment in Singapore
The room rates don’t look pretty as they have declined by more than 50% for all segments. Luxury and Upscale segments have had to slash prices by more than 70%.
| Avg. Room Rates | Jan 2020 | Jun 2020 | Change |
| Luxury | $491.20 | $142.75 | -71% |
| Upscale | $270.10 | $75.89 | -72% |
| Mid-tier | $171.84 | $64.81 | -62% |
| Economy | $112.36 | $50.54 | -55% |
We can combine both occupancy and room rates to get the Revenue Per Available Room (RevPAR) figure.
Luxury segment suffered the most with a 89% decline, their RevPAR is even lower than the Upscale segment! Upscale holds the highest RevPAR currently. Even if the ‘quarantine business’ is done, I believe the hotels in the Upscale segment can become a destination for local staycations and business travellers.
| RevPAR | Jan 2020 | Jun 2020 | Change |
| Luxury | $414.80 | $46.80 | -89% |
| Upscale | $224.90 | $47.40 | -79% |
| Mid-tier | $144.70 | $35.40 | -76% |
| Economy | $91.40 | $30.40 | -67% |
How to find hotel stocks?
You can use our Dr Wealth app to find stocks in the hospitality sector.
Unfortunately, we have decommissioned the Dr Wealth app.
Simply access the Discover page to screen for stocks by sector and stock exchanges:
The screen threw out the following results (based on stocks listed on SGX. I added the hospitality trusts too. The segments were determined by me which it was a best guess effort.):
| Listed Company | Operating Brands | Segment | Geography |
| Banyan Tree (SGX:B58) | Banyan Tree, Angsana, Cassia, Dhawa | Luxury | Various locations in Asia and in Austria |
| Memories Group (SGX:1H4) | Awei, Keinnara | Luxury | Myanmar |
| Shangri-La (SGX:S07) | Shangri-La, Traders, Kerry, Jen | Luxury and Upscale | Asia, Europe, Africa, Oceania, North America |
| Hotel Properties (SGX:H15) | COMO, Four seasons, Concorde, Hilton, Hard Rock, Holiday Inn | Luxury and Upscale | Asia, Europe and Africa |
| Bonvests (SGX:B28) | Cenizaro and Sheraton | Luxury and Upscale | Mauritius, Maldives, Tunis and Zanzibar, Singapore and Australia |
| Amara Hotel (SGX:A34) | Amara | Luxury and Upscale | Singapore, China, and Thailand |
| Mandarin Oriental (SGX:M04) | Mandarin Oriental | Luxury and Upscale | Asia, America, Europe and Africa |
| Stamford Land (SGX:H07) | Stamford | Upscale | Australia and New Zealand |
| ARA US HTrust (SGX:XZL) | Marriott and Hyatt | Upscale and Mid-tier | U.S. |
| Frasers HTrust (SGX:ACV) | Fraser, InterContinental, Novotel, Sofitel, ibis, Westin, Crowne | Upscale and Mid-tier | Asia and Europe |
| CDL HTrust (SGX:J85) | Copthorne, MyStays, Novotel, W, Ibis, Pullman and more | Upscale and Mid-tier | Asia, Europe and Oceania |
| AF Global (SGX:L38) | Crowne, Holiday Inn, Cityview, Somerset | Upscale and Mid-tier | UK, Thailand, Laos and Vietnam |
| GL (SGX:B16) | AMBA, Guoman, Hard Rock, Thistle | Upscale and Mid-tier | UK |
| Far East HTrust (SGX:Q5T) | Village, Rendezvous | Mid-tier | Singapore |
| Hotel Royal (SGX:H12) | Hotel Royal | Mid-tier | Singapore, Malaysia and Thailand |
| Hotel Grand Central (SGX:H18) | Grand Central, Grand Chancellor | Mid-tier | Australia, New Zealand, Singapore, Malaysia, and China |
| HL Global Enterprises (SGX:AVX) | Copthorne and Equatorial | Mid-tier | Malaysia, Shanghai |
It’s a long list even for hotel stocks listed in Singapore.
It is also difficult to compare because some of these stocks have other businesses besides hotels; some may have more than one hotel tier; most have hotels in many parts of the world.
Hence, it is quite tedious to choose a hotel stock to invest in.
What to do next?
In such situations, I would lay down some considerations.
First, I have mentioned that upscale is probably the segment that would recover the earliest (reasons: business travels, staycation and unlikely disrupted by Airbnb).
Second, countries that are business hubs and have Covid-19 under control will stand a better chance to receive more travellers. Singapore, China and Australia are some countries that came to mind. That said, I think countries like U.S. will still do okay because of the vibrant business activities scene, despite seeing infections on the rise. I would avoid exotic places such as Maldives (or resort types) because I do not think leisure travel will recover so soon but they may surprise if the rich can’t wait to relax at a remote resort. A dark horse I would say.
That would narrow my choices to Shangri-La, Hotel Properties, Amara, Mandarin Oriental, Stamford Land, ARA US HTrust, Frasers HTrust and CDL HTrust based on the above qualitative filters.
Now let’s look at some financial figures in the table below (based on their last FY reports). I would prefer those with low PB ratios (cheap against its underlying hotel value), low debt/asset ratios (debt room to borrow), and high cash ratios (enough cash to cover short term liabilities).
| PB Ratio | Debt/Asset | Cash Ratio | |
| Shangri-La | 0.4 | 43% | 0.7 |
| Hotel Properties | 0.8 | 36% | 0.6 |
| Amara | 0.5 | 46% | 0.2 |
| Mandarin Oriental | 0.5 | 15% | 1.4 |
| Stamford Land | 0.6 | 16% | 1.0 |
| ARA US HTrust | 0.4 | 43% (30 Jun 20) | 1.7 (30 Jun 20) |
| Frasers HTrust | 0.6 | 36% (30 Jun 20) | 2.0 |
| CDL HTrust | 0.6 | 37% (30 Jun 20) | 1.0 (30 Jun 20) |
Mandarin Oriental has the best set of numbers while Stamford Land comes in close. The 3 hospitality trusts are decent too, with cash ratios more than 1.
Some of you may prefer hospitality trusts. Their dividend payouts tend to be more certain as they have an incentive to distribute dividends, in order to enjoy tax savings.
Hospitality trusts also tend to have higher disclosures on their financial status and provide timely updates. As they are more popular among investors, their stock prices would tend to be more efficient when they rebound. This may not apply to non-trust hotel stocks like Mandarin Oriental and Stamford Land. Such stocks may not be able to unlock their value if there aren’t significant events happening.
I won’t be making a decision for you but I believe I have given you sufficient information for you to make a choice. I haven’t invested in any hotel stocks yet but I am interested to pick one up.
What about you?
Would you buy hotel stocks?
What about Ascott Residence Trust? That would actually be my preference among the hospitality trusts.