Asked on 31 May 2019
Discuss anything about Shangri-La Asia Limited SGX: S07 share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment in Shangri-La Asia Limited SGX: S07
Shangri-La owns and/or manages over 100 hotels and resorts throughout the Asia Pacific, North America, the Middle East and Europe. In total, they have a room inventory of over 40,000. Besides, new hotels are under development in Australia, Bahrain, mainland China, Cambodia, Indonesia, Malaysia and Saudi Arabia.
Some of the key brands that they operate include Traders Hotels, Kerry Hotels and Hotel Jen. Their foray into different brands is a move to diversify their customer base, as they served mostly a premium customer base. It seems that most of the development and focus has been on emerging markets, especially in Asia.
As the company has grown its portfolio of hotels, there have also been moves to consolidate operations. The company has also taken on more innovative strategies such as the use of an app.
Strong Understanding of Customer Experience: Shangri-La has been very proactive in using data to analyse customers needs and expectations. This has led to them paying special attention to treat guests as "kin" and not as "kings", as well as making sure that business travellers were well taken care of.
Loyalty Program: Surprisingly, 4 out of 10 customers are members of their loyalty program. This could suggest that customers are more sticky to the Shangri-La group and switching costs for them are high. Having a group of hotels spread around the world means that customers can always enjoy the Shangri-La experience, which might garner brand loyalty.
Premium Brand Name: One of Shangri-La's key strength is how it has developed a brand name that is synonymous with premium hospitality experience. Moreover, Shangri-La is also one of the few key premium brands that have very good international exposure.
Disruption By Airbnb: Much of the disruption has occurred from how travellers can now choose to stay in Airbnb instead. I do believe that Shangri-La can defend its market position among Airbnb. This is because Airbnb caters to guests who are in the low to mid range. However, it would be more challenging for homeowners to match the premium experience offered by Shangri-La.
Shangri-La not only offers comfortable accommodation, but also very good customer service and other hospitality services such as premium dining and spas. However, I do think that hotel chains in the premium bracket, such as Marriot and Hilton would be affected by this disruption, though perhaps not as extensively as before.
Competition into the Asian Market: Other premium hotel brands have also expanded into the Asian market to try to get a piece of the premium market. This has also led to more intensive competition for Shangri-La in the region. Additionally, Mandarin Oriental and other Asian premium brands compete for the Shangri-La's same target market.
Lack of Diversification: The premium Asian experience offered by Shangri-La may not bode well in newer markets such as Cambodia. Additionally, they have a lack of chains in the West. Most of their hotel segments are premium brands, which took a huge hit during the downturn in 2008.
I was not able to determine a conclusive value for the shares, as my estimates and assumptions showed that the shares were grossly overvalued. I'm sure my valuation did not hit the actual intrinsic value. However, I would like to share a few points on why the company isn't doing very well.
Firstly, the company's operating margin was lower than the industry average. I believe that this could occur due to the high fixed operating costs from the opening of the new hotel outlets. These outlets incur costs even when occupancy rates are low.
Secondly, the Sales/Capital ratio is low as well. This could be due to the need to employ additional capital for expansion. This results in very high capital expenditure that the firm requires which reduces free cash flows.
Third, the cost of capital for the firm far exceeds the return on capital. The low return on capital is due to lower than average operating margins as well as capital employed for capital expenditures. The cost of capital is 4 times higher than the return on capital. This means that the company needs to substantially increase earnings and profitability in the future to pay off debt before growth generates positive value.