Shangri-la finds new life in tourism industry rebound 

The high-end hotel operator ended three years of losses with a return to profits last year, buoyed by a post-pandemic rebound in global travel

Key Takeaways:

• Shangri-la earned a profit of $184 million last year and distributed a dividend of HK$0.15 per share to celebrate its return to the black after three years of losses
• The Hong Kong-listed hotel operator expects its next growth driver to come from a pickup in Chinese traveling abroad

By Lau Chi Hang

As the global economy stumbles its way back to post-pandemic health, tourism stands out as a surprising bright spot that has rebounded much more strongly. High-end hotel operator Shangri-la Asia Ltd. (0069.HK) has benefited from that rebound, impressing investors with a strong performance last year that included a return to the black after three years of losses. 

The Shangri-la brand takes its name from the fictional Never-never land of Shangri-la created by British author James Hilton in his novel “Lost Horizon” in the 1930s. Cut off from the rest the world, the place’s inhabitants live in a sort of paradise similar to the wonderland in the Chinese classic “Peach Blossom Spring” by poet Tao Yuanming. 

Exactly how this idyllic name ended up on a hotel chain is yet another story.

In 1971, when legendary Asian sugar king Robert Kuok of Malaysia was planning to establish a top-tier hotel brand in Singapore, he told his French friends and raised the subject of a name with them. One responded dismissively with the word “idiot” and threw out the name Shangri-la as well. And thus a name was born.

CFO revolving door 

The rest of the company’s history is familiar to people in the region. Shangri-la soon became a world-renowned hotel group and carved out a comfortable spot for itself at the higher end of the market until 2019 when the pandemic broke out. It went on to lose money for three consecutive years. It also suffered from management turbulence during that time, with three CFOs coming and going, leaving many outsiders scratching their heads. 

Just when investors were losing their patience, the company received a lifeline with the unexpectedly strong tourism recovery as people spent lavishly on “revenge travel” after three years of staying close to home. As that happened, Shangri-la’s revenue rose 46.5% last year to $2.14 billion. It also celebrated a return to the black with a profit of $184 million, reversing losses of $46 million in 2020, $29 million in 2021 and $159 million in 2022. With money to spare, the company also resumed returning some of its profits to shareholders with an end-of-the-year dividend of HK $0.15 per share.

The company’s main businesses include hotel management and property investment. Besides Shangri-La, its other chains include Kerry, JEN and Traders Hotel, and it has a total of 103 hotels with 41,800 rooms. It owns 83 of those properties and provides management services for the rest. It also has a portfolio of 2.43 million square meters of offices, commercial properties and serviced apartments.

Revenue from its hotel business rose 49.3% last year to $2.03 billion, while its investment property revenue rose by a slower 8.6% to $108 million.

Cost cutting without layoffs

Improvement in the broader travel market was the main driver behind Shangri-la’s new lease on life. According to the World Tourism Barometer published by the United Nations Tourism Organization, international tourism recovered to 88% of pre-pandemic levels in 2023, with 1.3 billion trips made by international tourists who spent an estimated $1.4 trillion, 93% of levels from 2019.

It was little surprise that Shangri-la, whose hotels are concentrated in popular international travel destinations, benefited from the trend. The company said surging demand for hotel rooms on the Chinese Mainland and in Hong Kong, combined with growing demand for travel worldwide, turbocharged its global business.

The company should also be commended for making its own strategic recalibration during the pandemic. It took advantage of slow days to cut costs and increase efficiency. And while many companies laid off staff to trim costs during the pandemic, only to find themselves short-handed afterwards, Shangri-la tried its best to retain front-line workers. That left it with enough skilled staff to quickly ramp back up without having to hire and train new workers as the industry bounced back. 

But some also believe the strong rebound in the hospitality and tourism industries was already a forgone conclusion, and that Shangri-la’s post-pandemic bounce-back was equally driven by the low base for its performance in 2022. With much stronger numbers for 2023, its ability to sustain the rapid growth into 2024 could be much harder.

Room for occupancy improvement 

To answer that question, we should look at the company’s occupancy rates, which will be a major factor affecting its outlook. Last year, its average occupancy rate was 62%, a relatively low figure but still up 20 percentage points from 42% in 2022. Meanwhile, its revenue per available room or revpar, a widely watched industry metric, rose by 69% to $108. That means there’s room for the occupancy rate to go up further if the rebound continues. 

Market projections show the tourism industry’s outlook remains rosy. The United Nations Tourism Organization’s latest travel confidence index survey found that 67% of respondents believe the outlook will be better or much better this year than in 2023. Shangri-la also estimates that as international travelers return to China, and with more favorable policies and promotions from countries like Singapore, Malaysia and Thailand for outbound Chinese travelers, international travel could become the next catalyst for its business. 

Despite its business rebound, Shangri-la’s valuation is still relatively low with a price-to-earnings (P/E) ratio of around 12 times. That’s well behind the 66 times for Hong Kong and Shanghai Hotels Ltd. (0045.HK) and 21 times for H Word Group Ltd.(1179.HK; HTHT.US). In net asset terms, Shangri-la’s hotels and properties were valued at nearly $11 billion at the end of last year, with a net asset value of $1.47 per share, representing a 57% discount to the stock’s closing price of HK$4.90 last Thursday.

In a nutshell, Shangri-la is a company with solid fundamentals and business prospects. But local equity investors aren’t so interested in hotel stocks, which may explain the drop in its share price after its latest annual results announcement. Such solid stocks could continue to suffer with the slump in Hong Kong’s stock market, compounded by China’s economic slowdown and growing China-U.S. tensions. That means that companies like Shangri-la are hardly guaranteed of being rewarded for their improving performance. 

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