#1First Capital A Janashakthi Group Company Sri Lanka Tourism Sector Bright Horizons: Navigating Tourism's Growth Revival EQUITY | SRI LANKA | HOTELS | SECTOR UPDATE | SEP 2023 FIRST CAPITAL RESEARCH Analysts: Tharusha Ashokgar [email protected] Nethmi Fernando [email protected]#2Executive Summary ☐ ■ First Capital A Janashakthi Group Company Global tourism bounced back in 1Q2023, reaching 80% of pre-pandemic levels with about 335.0Mn international travelers, more than the 2022 figures. The Middle East excelled, exceeding 2019 arrivals by 15% and fully recovering within a single quarter. Meanwhile, Asia and the Pacific region hit 54% of pre-pandemic levels, with this upward trend set to accelerate further as most destinations, including China, have reopened. In 1H2023, Sri Lanka witnessed a robust tourist arrival recovery, surpassing targets. The currency depreciation and effective tourism promotion campaigns positioned Sri Lanka as an attractive and affordable destination. Consequently, we have raised our 2023 year-end target to 1.5Mn arrivals, reflecting an expected 106.0% YoY growth, resulting in earnings of LKR 1.9Bn. Currently, the country-wide occupancy rate stands at 42.0%, leaving ample room for further recovery. China accounted for 11.4% of the total tourists to Sri Lanka in 2018 and remained the top source market next to India. The easing of restrictions in China is poised to bolster tourist arrivals and drive growth in Sri Lanka's tourism sector. The notable increase in Chinese arrivals to Sri Lanka is indeed an encouraging development for the tourism sector, as Chinese tourists are widely recognized as heavy spenders. Further, significant devaluation of LKR against USD has made holidays in Sri Lanka even more affordable for international travelers compared to pre- pandemic levels. Despite an increase in local prices, accommodation and other travel expenses have significantly decreased by approximately 40% in terms of USD as a result of LKR devaluation. Sri Lanka possesses significant potential to attract tourists from the Meetings, Incentives, Conventions, and Exhibitions (MICE) sector, primarily owing to its strategic location in the Indian Ocean. This segment of tourists typically spends three times more than leisure travelers. Sri Lanka has been steadily approaching pre-pandemic levels in the MICE sector, with India, Bangladesh, Pakistan, Germany, the Middle East (including Saudi Arabia, Doha, and Dubai), and the UK playing vital roles in contributing to this positive trend. Top Picks: Overseas Exposure: AHUN, KHL and CONN Coastal Hotels: City Hotel: RPBH,SHOT and STAF AHPL 2#3Tourism Snapshot Tourist Arrivals 2023YTD: 904,318 2022719,978 Average Duration of stay *2023 8.6 Days 2022: 9.3 Days Occupancy *2023: 42.0% 2022: 30.4% *Data as of Jan-May 2023 ☑ 4 First Capital A Janashakthi Group Company m Tourism Earnings 2023YTD: USD 1.1Bn 2022 USD 1.1Bn MICE arrivals out of total arrivals 2023 Aug: 5.0% 2022 Aug 1.0% Average Spending per day *2023 USD 164.4 2022 USD 164.4 3#4ASPI vs Consumer Services Sector Index First Capital A Janashakthi Group Company The consistent increase in tourist arrivals, exceeding our projected targets, underscores a promising resurgence in the Hotels and Tourism sector. Hence, considering the positive outlook ahead for the Hotels and Tourism industry, we maintain our recommendation at BUY ASPI 15,000 13,000 TRADING BUY Price Movement of ASPI vs Consumer Services Sector TRADING BUY BUY CS Index 600 BUY BUY 550 11,000 9,000 7,000 5,000 3,000 1,000 Jan-21 Feb-21 Mar-21 Apr-21 May-21 Jun-21 Jul-21 Aug-21 Sep-21 Oct-21 Nov-21 Dec-21 Jan-22 Feb-22 Mar-22 ASPI Apr-22 Consumer Services Index May-22 Jun-22 Jul-22 Aug-22 Sep-22 Oct-22 Nov-22 Dec-22 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Source: CSE Aug-23 4 500 450 400 350 300 250 200#5More than 65% of hotel sector counters showed YoY appreciation, amidst the steady recovery of the industry First Capital A Janashakthi Group Company AHPL 50% SHOT.X 39% TAJ 36% KHL 31% NEH 30% AHUN 29% SERV 25% PEG 25% First Capital Research recommended stocks CONN 24% STAF 23% KHC 21% RHTL 18% GHLL 16% EDEN 15% RCH 14% RFL 14% HSIG 13% SHOT 9% TRAN 5% BRR 3% REEF 3% 0% CITW 0% BERU -1% BBH -2% CITH -4% RPBH -4% -6% CHOT LHL -7% MRH With the gradual resurgence in the tourism sector the share prices of nearly 65% of the hotels listed in the CSE have risen on a YoY basis (Sep 2022-Sep 2023). -7% RENU -11% JETS -11% MARA -12% SIGV -12% TANG -30% PALM 5 Source: First Capital Research#6■ South Asia 47% World Middle East Europe Recovered ■Pending Africa Americas Asia Pacific 2019 2022 10% 12% 20% 100% 90% 88% 14% 86% 46% ■ North-East Asia 38% 5% 19% 80% 28% ■South-East Asia 9% 54% ■ Oceania 7% 47% Asia and Pacific tourism arrivals halfway to 2019 levels, while Middle-East fully recovers in 1Q2023 -73% 2020 -72% 2021 9% 7% Inbound Outbond 2022 6 Source: UNWTO, Statista Travel Sentiment (Net score) South Asia's market share in the Asia Pacific region surged from 9% in 2019 to 28% in 2022, marking the fastest tourism revival Jan-20 Apr-20 40 + 20 1 ! 16% 16% 24% 24% T | I -20 J -40 I | I -60 I T I T | I 2023E 2024E Jul-20 Oct-20 Jan-21 Apr-21 Jul-21 Oct-21 Jan-22 Apr-22 Occupancy Rates (%) Jul-22 Oct-22 Jan-23 Global Tourism Resurgence- at a glance Global inbound and outbound tourism experienced a notable resurgence in 2022, and anticipated to grow further 115% 118% I I Pent up demand for travel has driven occupancy ratios close to pre- pandemic levels 60 First Capital A Janashakthi Group Company Apr-23 Jul-23#7Global Tourism Resurgence- Asia and Pacific Region Top 5 tourist destination - South Asia Top 5 tourist destination - South-East Asia India Sri Lanka Maldives Nepal Bangladesh Thailand Maldives stood out as the only South Asian country to achieve robust growth in tourism, nearly reaching pre- pandemic levels in 2022. Singapore Vietnam 0.0 2.0 4.0 6.0 8.0 10.0 12.0 Arrivals Mn ■2019 2022 China United States Germany United Kingdom France Russia Australia Canada Italy Spain International Tourism Expenditure 2019 Vs 2022 (USD Bn) ■2019 ■2022 First Capital A Janashakthi Group Company Indonesia South-East Asia account for nearly 46.0% of the visitors to Asia Pacific in 2022 despite the internal travel restrictions that persisted during the year. Moreover, compared to global peers, Asia's travel and tourism sector appears better positioned to weather. Philippines 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 40.0 45.0 Arrivals Mn 2019 2022 0.0 50.0 100.0 150.0 200.0 250.0 300.0 China stands out as the sole Asian country to not only appear in the top rankings for outbound travel expenditure but also to lead the list. Despite the travel restrictions imposed during the pandemic, China remains one of the largest spenders among arrivals in 2022. Sri Lanka's list of the top 10 source markets for 2022 includes seven of the world's top 10 spending source markets. Sri Lanka accounted for around 0.11% of China's outbound travelers in 2019 despite China being one of the largest source market for Sri Lanka. Source: UNWTO 7#82012 2013 Surpassing expectations: YoY rebound in tourist arrivals in Sri Lanka sparks new hope.. First Capital A Janashakthi Group Company Tourist Arrivals Resurgence in 1H2023: Tourist arrivals in Sri Lanka recorded a steady recovery in 1H2023 outpacing the targets. This recovery was supported mainly by high global vaccination rates, increased air connectivity, along with the lifting of travel restrictions issued by major source countries. Additionally, the significant depreciation of the LKR and tourism promotion campaigns played a pivotal role in positioning Sri Lanka as an attractive and affordable destination for travel. Given the accelerated pace of this recovery, we have revised up our 2023 year-end target to 1.5Mn arrivals (previous: 1.2Mn), reflecting an anticipated YoY growth of over 100.0%. Seasonal Trends in Occupancy Rates: Despite Sri Lanka's year-round appeal to tourists, it's notable that the Q1 (Jan to Mar) and the Q4 (Oct to Dec) collectively accounted for a significant portion, approximately 66.5%, of the total annual tourist arrivals in 2022. This trend is evident in the consistently elevated average occupancy levels observed during the first and fourth quarters of previous years. 2014 2015 No. of Arrivals Forecast for 2023E tourist arrivals revised up to 1.5Mn with occupancy to reach 50% Average 10Yr occupancy (2010- 2019): 71% Occupancy 3,000,000 80% 71% 72% 74% 75% -0.75% 73% 73% -70% 2,500,000 60% 57% 2,000,000 50% 50% 1,500,000 40% 30% 1,000,000 500,000 5Yr CAGR of 12.9% 15% 19% 1,482,943 1,855,220 2,530,192 30% 20% 10% 0 0% 2016 2017 2018 Tourism arrivals 2019 2020 Occupancy 2021 2022 2023E 2024E Source: SLTDA, First Capital Research 8 2025E#9...and drives significant dollar inflow Earnings Earnings from tourism surged at a 20.6% 5-year CAGR from 2013 to 2018, outpacing arrivals growth, driven by the significant depreciation of LKR, resulting in higher average spending per arrival. (USD Mn) 5,000.00 4,500.00 4,000.00 3,500.00 3,000.00 2,500.00 2,000.00 1,500.00 1,000.00 5Yr CAGR of 20.6% 500.00 0.00 1,927.8 2012 2013 2014 2015 2010 2017 2010 2010 2020 2021 2022 20258 Earnings (USD Mn) Receipts per tourist per day USD ह First Capital A Janashakthi Group Company Peer Countries Average No.of Arrivals spending per (Mn) tourist in 2022 (USD) 200 Maldives 2,685 1.68 180 Singapore 1,870 6.31 Sri Lanka 1,578 0.72 160 Philipines 1,575 2.65 Thailand 1,150 11.16 140 Indonesia 1,141 5.89 Vietnam 1,049 3.66 120 I Global 1,106 969.4 4,048.3 2,968.4 2024E 2025E 100 80 Sri Lanka is well below regional peers such as Maldives and Singapore, indicating that Sri Lanka is not positioned as a high-end destination in comparison. Notably, the average spending by tourists in Sri Lanka surpasses both the global average and the majority of top Asian destinations including Thailand, and Indonesia, which are preferred by travelers. Source: SLTDA, UNWTO, First Capital Research 6#10Monthly tourist arrivals show remarkable growth with.... First Capital A Janashakthi Group Company Month 2018 2022 2023 Growth% 2023/2022 Daily Average 2023 Top Source Markets to Sri Lanka Source market 2023 YTD (Jan-Aug) 2018 Jan 238,924 82,327 102,545 25% 3,308 Feb 235,618 96,507 107,639 12% 3,844 India 170,247 (112.5% YoY) 424,887 Mar 233,382 106,500 125,495 18% 4,048 125,137 64,497 Russia Apr 180,429 62,980 105,498 68% 3,517 (151.5% YoY) May 129,466 30,207 83,309 176% 2,687 83,339 254,176 UK (26.9% YoY) Jun 146,828 32,856 100,388 206% 3,346 61,682 156,888 Jul 217,829 47,293 143,039 202% 4,614 Germany (52.8% YoY) Aug 200,359 37,760 136,405 261% 4,400 41,243 106,449 France Sep 149,087 29,802 107,343 260% (46.1% YoY) 3,578 Oct 153,123 42,026 128,623 206% 4,149 Australia 39,186 110,928 (112.8% YoY) Nov 195,582 59,759 160,377 168% 5,346 China Dec 253,169 91,961 182,282 98% 5,880 37,743 (1483.2% YoY) 265,965 Total 2,333,796 719,978 1,482,943 106% 4,063 10 Source: SLTDA, First Capital Research#11No. of Arrivals With more than 150,000 arrivals YTD, India topped the source market list in 2023 % Share ...Continued boost expected from India and China Relaxed restrictions in China to boost tourist arrivals and stimulate growth in Sri Lanka's tourism sector First Capital A Janashakthi Group Company % Share No. of Arrivals 450,000 400,000 35% 300,000 14% 30% 250,000 12% 350,000 25% 10% 300,000 200,000 250,000 20% 8% 150,000 200,000 15% 6% 150,000 100,000 10% 4% 100,000 5% 50,000 2% 50,000 0 0% 0 0% 2017 2018 2019 2020 2021 2022 2023 (Jan- Aug) 2017 2018 2019 2020 2021 2022 2023 (Jan- Aug) Arrivals % Share Arrivals ⚫% Share India emerged as the largest source market for outbound travelers in Asia in 2022 with a registered growth rate of 190.0% YoY significantly higher than the average global increase of 90%. India, being the largest source market for Sri Lanka, offers significant potential due to its rapidly expanding middle-income population. The middle-class segment has grown from less than 10% of the total population in 2012 to 31% in 2021 and is projected to double by 2047. Over 50% of trips from India to Sri Lanka were for leisure purposes, with business travel also on the rise, accounting for 16% in 2022. Average spending per departure: 2022- USD 1,516.3 (2019- USD 859.0) China accounted for 11.4% of the total tourists to Sri Lanka in 2018 and remained the top source market next to India. China is the leading country in terms of outbound tourism globally, contributing to over 20.0% of the world's outbound tourism expenditure in 2022. Sri Lanka represents only 0.11% of China's outbound departures. However, with the reopening of borders for travel, there is an anticipated increase in Chinese tourist arrivals to Sri Lanka, supported by an expansion in China Eastern Airlines flight frequency from 1 flight to 5 flights per week. Average spending per departure: 2022- >USD 10,000 (2019- USD 1,647) Source: SLTDA, UNWTO 11#12Depreciation of LKR making Sri Lanka holidays more affordable than pre- pandemic levels First Capital A Janashakthi Group Company Despite an increase in local prices, the accommodation and other travel costs has significantly dipped by over 25.0% from pre pandemic level rates in terms of USD as a result of LKR devaluation which would be an encouraging factor for tourists to visit Sri Lanka. The CCPI has consistently slowed down, surpassing expectations, signifying lower inflationary pressures and potentially boosting consumer spending power 80.0% LKR depreciation of over 80% compared to pre pandemic times, made the cost of living in SL more affordable for international travelers 380.00 70.0% 60.0% 50.0% 51.7% 50.6% 50.3% 40.0% 30.0% 20.0% 10.0% 35.3% 25.2% 12.0% 6.3% 4.0% Despite cost escalations, Average Room Rate (ARR) remained relatively cheaper compared to pre pandemic levels amidst steep depreciation LKR 360.00 360.00 28,000 360.00 340.00 320.00 26,000 Jun-24, ARR dipped by over 40.0% in 130.0 terms of USD USD 140.0 320.00 340.00 24,000 120.0 300.00 320.00 320.00 22,000 + 110.0 280.00 295.52 20,000 T I 260.00 280.00 100.0 1 90.0 18,000 240.00 220.00 200.00 Dec-20 Mar-21 Jun-21 Sep-21 Dec-21 Mar-22 Jun-22 Sep-22 Dec-22 Mar-23 Jun-23 Sep-23 Dec-23 Mar-24 Jun-24 I 80.0 16,000 1 I 70.0 14,000 I 60.0 12,000 T 50.0 I 10,000 40.0 2017 2018 2019 2020 2021 2022 1H2023 Average Room Rate (LKR) Average Room Rate (USD) Source: Department of census and statistics, CBSL, SLTDA, First Capital Research 12 4.3% 4.7% 180.00 2.2% 0.9% 0.0% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec I 2022 Actual YoY Inflation .. 2023E YoY Inflation 2023 Actual YoY Inflation#13First Capital A Janashakthi Group Company Cost comparison of trips among peer countries - USD Average Room Rate (ARR USD) -City Hotels Type of Accommodation Sri Lanka (Min. room rate) Sri Lanka (Colombo)- Current Vietnam Thailand Indonesia Maldives (Ho Chi Minh City) | (Bangkok) (Jakarta) (Malé) 5 Star 100+ 75+ 150+ 90+ 120+ 190+ 4 Star 75+ 50+ 70+ 70+ 60+ 130+ 3 Star 50+ 35+ 40+ 45+ 45+ 75+ Flight fare (USD) Sri Lanka Vietnam Thailand Source Market (Colombo) (Ho Chi Minh City) (Bangkok) Indonesia (Jakarta) (Malé) Maldives India 168.0 226.0 247.0 300.0 295.0 United Kingdom 1,000.0 950.0 1,100.0 1,000.0 China 550.0 350.0 170.0 300.0 1,250.0 950.0 Gasoline Price (USD Per liter) Sri Lanka Vietnam Thailand Indonesia Maldives Gasoline 1.29 1.04 1.35 0.96 0.96 *rates as of 18th Sep 2023 Source:Booking.com, Skyscanner, Globalpetrolprices 13#14Sri Lanka tops list of affordable destinations for Digital Nomads Cost of living (rent, food, transport and utility bills) per month Rank Countries GBP USD Sri Lanka £491.00 $624.00 2 Argentina £573.00 $728.00 3 Colombia & North Macedonia £578.00 $734.00 4 Indonesia £591.00 $751.00 5 Malaysia £649.00 $824.00 6 Brazil £677.00 $860.00 7 Ecuador £694.00 $882.00 8 South Africa £738.00 $937.00 9 Cabo/Cape Verde £746.00 $948.00 10 Albania £747.00 $948.00 11 Thailand £755.00 12 Romania £765.00 $959.00 $972.00 A Digital nomad visa is a temporary residence permit that allows remote workers and freelancers to live and work in a foreign country for an extended period while conducting their work online. The availability of digital nomad visas in numerous countries worldwide, along with the substantial remote workforce, including over 5Mn Brits and 16Mn Americans, offers an invaluable opportunity for flexible and location-independent work. Among the 50 countries offering digital nomad visas, Sri Lanka stands out as the best value for money, boasting an average monthly cost of living at USD 624.0. This represents a 14% savings in disposable income compared to the second most affordable country on the list. First Capital A Janashakthi Group Company The USA is one of the expensive countries for day-to-day living, with costs exceeding USD 2,000 per month. Their healthcare system is notably the most expensive, with citizens spending over 40% more per person compared to other countries. The UK is ranked 16th among the most expensive countries to live in, with an average cost of living exceeding USD 1,800. In 2022, households in the UK experienced significant increases in fuel and energy bills, along with soaring prices in grocery stores. Source: Flamingo 14#15Sri Lanka rise as a premium MICE destination 7.0% Sri Lanka's tourists' authorities are promoting MICE tourism in expectations of filling 12.0% of the 1.5Mn tourists target for 2023 as MICE tourists are anticipated to pay 3x the amount of leisure tourist. South Asia, Middle East and Europe are the key markets for drawing MICE travelers. SL expect to fill nearly 12% of the total tourist arrivals target in 2023 through MICE tourism which may bring in USD 300.0Mn by the end of 2023 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Jan-22 Mar-22 May-22 Jul-22 Sep-22 ΖΖ-ΛΟΝ Jan-23 Mar-23 First Capital A Janashakthi Group Company Sri Lanka has been gradually reaching the pre pandemic MICE levels and the main source market has been India, Bangladesh, Pakistan, Germany, the Middle East, Saudi, Doha, Dubai and the UK have also been contributing positively. May-23 Jul-23 Moreover, India organized multiple conferences namely Tata Tiscon and V institute of India within the first 1Q2023 which attracted over 500 travelers. Furthermore, Sri Lanka is anticipated to host a number of events namely Lupin and Pfizer, Indian Travel agents AGM and the inaugural Jaffna MICE EXPO which are set to be major events. The India outbound MICE tourism market is projected to reach USD 13.4Bn by 2031, driven by growth in Indian economy amidst the increase in larger disposable income for businesses and individuals. This has led to increased corporate spending on MICE activities, including international events, conferences, and exhibitions. World-class infrastructure from hotels and many in-progress developments, such as Cinnamon Life, ITC Hotels and Port City Colombo, is also slated to open more doors to growth and investment in the future out of which the officials anticipate USD 3.0Bn to enter the country in 2023 as Sri Lanka is now identified as a potential market place. Source: SLTDA, India outbound 15#16Maldives; setting the Gold Standard in tourism as Asia's premier tourism destination First Capital A Janashakthi Group Company Arrivals '000 Maldives recorded bullish resurgence in tourists' arrivals surpassing pre-pandemic levels Revenue breakdown: AHUN and KHL (Sri Lanka vs Overseas operations) 100% 1,800 150% 80% 74% 1,600 1,400 1,200 1,000 800 1,484 1,390 1,286 1,234 1,703 1,675 1,322 100% 60% 73% 53% 73% 56% 85% 86% 85% 78% 79% 74% 48% 50% 1,278 40% 0% 20% 600 -50% 0% 400 555 FY18 FY19 FY20 FY21 -100% AHUN-SL AHUN-Overseas KHL-SL FY22 KHL-Overseas FY23 200 2015 2016 2017 2018 2019 Tourism arrivals ('000) 2020 2021 YoY gowth (%) 2022 2023YTD -150% Tourist arrivals in the Maldives have shown remarkable resilience, nearing pre-pandemic levels in 2022. This recovery can be attributed to the government's innovative approaches, effective publicity, proactive crisis management, and the development of new resorts and attractions. First capital Research expects LKR appreciation against the greenback to be limited in the future amidst the relaxation on imports hence, AHUN, KHL and CONN that are exposed to foreign markets may experience favourable measures 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% FY18 FY19 Occupancy breakdown: AHUN and KHL (Sri Lanka vs Overseas operations) FY20 FY21 FY22 Source: Ministry of Tourism Maldives, Annual reports KHL-Overseas AHUN- Overseas KHL-SL AHUN-SL FY23 16#17Enhancing a competitive edge with an Inhouse Travel Agency Aitken Spence Hotel Holdings PLC Actken Spence Travels 100 Operating an in-house travel agency alongside a hotel can yield a multitude of advantages. Notably, it provides unparalleled convenience for guests by offering a one-stop solution for all their travel needs, from booking flights to arranging tours, all within the hotel premises. Hayley's Leisure PLC John keells Hotels PLC Hayleys TRAVELS mackinnons TRAVELS A John Keells Group Company This streamlined approach allows hotels to curate tailored packages, accommodating diverse guest preferences and budgets, increasing the likelihood of bookings and increasing occupancy whilst boosting profitability. E First Capital A Janashakthi Group Company Source: Annual reports 17#18Increased tourism sector investment signals strong investor confidence First Capital A Janashakthi Group Company SLTDA registered Accommodation capacity No. of Rooms No. of Establishments 60,000 50,000 Registered rooms at a 5Yr CAGR of 6.0% 6000 40,000 30,000 20,000 10,000 0 TTH 5000 4000 3000 2000 1000 0 2017 2018 2019 2020 2021 2022 Graded rooms Supplementary rooms No.of Establishments 2,000 1,713 2,513 Mix of Classified Tourist hotel rooms (2019 vs 2022) 2019 2022 722 1,687 845 ■ 5 Star 1,903 5,354 ■ 4 Star ■ 3 Star 2,449 2 Star 5,931 ■1 Star 2,513 Boutique Hotel 3,110 Accommodation Capacity In 2022, out of 3,829 registered accommodations, only 156 were classified as tourist hotels, with 37 being 5-star hotels, accounting for just 4.1% of Sri Lanka's total accommodations. The Western province had the highest number of star hotels (57), followed by the Central (37) and Southern (30) provinces. The concentration of classified tourist hotels in the Western, Central, and Southern provinces highlights uneven development in tourism-related infrastructure and tourist destinations. The ratio of graded to supplementary rooms shifted from 35% graded to 65% supplementary rooms in 2019 to 31% graded to 69% supplementary rooms in 2022. Investment Projects Investment in the sector declined by 48.8% YoY to USD 68.0Mn due to delays and downscaling of projects by investors, aggravated by construction halts amid challenging economic conditions in 2022. Presently, there are 95 hotel projects with 5,424 rooms under construction at various stages of completion. Additionally, 25 hotel projects with a capacity of 1,623 rooms are expected to be completed by 2023. Source: CBSL, Annual report 18#19Risk Assessment IMPACT LOW LIKELIHOOD LOW MEDIUM Geo-political instability HIGH Depreciation of LKR against the USD VERY HIGH MEDIUM HIGH VERY HIGH Arrivals of unregulated homestay/sharing accommodation such as Airbnb Taxes and levies pertaining to businesses engaging in the tourism sector Electricity tariff hike and power shortages Re-introduction of Minimum Room rate for city hotels Extensive skill migration and shortage of experienced workforce 19 First Capital A Janashakthi Group Company#20CASE STUDIES: Tourism: Bridging the Economic Gap XA 20#21Despite the harsh economic crisis, GREECE witnessed positive growth momentum in tourist arrivals First Capital A Janashakthi Group Company Tourism is a vital pillar of Greece's economy, serving as one of the nation's most significant sectors. As a top European tourist destination, Greece's status as the most visited country has directly and indirectly contributed to nearly 20% of the country's GDP, playing a pivotal role in its economic recovery. Contribution Debt to GDP 220.0% Debt to GDP and Economic Growth (%) GDP growth 10% Arrivals Mn 35 Tourist Arrivals vs Tourism contribution to GDP to GDP 14.0% 8% 210.0% 6% 200.0% 4% 2% 190.0% 0% 180.0% -2% 170.0% -4% -6% 160.0% -8% 150.0% -10% 2017 2018 2020 2021 2022 ING 2019 IM 30 12.0% 25 10.0% 20 8.0% 15 6.0% 10 4.0% 5 2.0% 0 0.0% 2017 2018 2019 2020 2021 2022 Debt to GDP GDP growth Tourist arrivals (Mn) Tourism contribution to GDP The 'Euro Crisis' stemmed from fiscal mismanagement in countries such as; Ireland, Spain, Portugal, and Greece that benefited from economic windfalls upon, adopting the Euro which resulted these countries to experience a recession. The recession weakened Greece's already paltry tax revenues which caused the recession to worsen leading the country to a liquidity crisis. The Greek government then requested bailouts totalling USD 307.2Bn from the IMF through a stand by arrangement (2010-2012) and the EFF (2012-2016) which conditioned on budget reforms, spending cuts and higher tax revenues. In 2022, Greece has paid off the final tranches of bailout loans owed to the International Monetary Fund earlier ahead of the deadline amidst the economic recovery and further support lent by the Euro zone. Source: UNTWO, IMF 21#22Tourism in Jamaica is the leading source of foreign exchange, a significant GDP contributor, and a long-standing, rapidly growing industry First Capital A Janashakthi Group Company Tourism has been a strong pillar in Jamaica for its unique culture, beaches and the people, and has been contributing largely to the country's economic development. Tourism directly employs 175,000 Jamaicans and generates indirect employment for another 354,000 Jamaicans. Overall, the tourism sector has grown by 36% over the past 30 years against a total economic growth of 10%. Debt to GDP Debt to GDP and Economic Growth (%) Contribution 120% GDP growth 6% 3 4% 100% 2% 80% 0% -2% 60% -4% 40% -6% -8% 20% -10% 0% -12% 2017 2018 2020 2021 2022 Debt to GDP GDP growth ITNII HM 2019 15.0% 10.0% 5.0% 0.0% 2019 2020 2021 2022 Tourism contribution to GDP 2.5 2 Arrivals Mn Tourist Arrivals vs Tourism contribution to GDP to GDP 35.0% 30.0% 25.0% 20.0% 1.5 1 0.5 0 2017 2018 Tourist arrivals (Mn) . Jamaica faced its biggest financial crisis as income started to plateau in 1990 and a further setback following the 2008 global financial crisis. ⚫ The country faced its biggest recession followed by policy missteps, high public debt, emigration and brain drain. Hence by 2013 Jamaica's public debt reached 147% to GDP. The government then requested bailouts from the IMF under the EFF 2013 and a stand by arrangement in 2016 totalling SDR 2.6Bn as the country was in the verge of an economic meltdown. Source: UNTWO, IMF 22#230000 ออดอ GGGC 26 23 59 26 06 38.GOX 21.6096 37.60% 1.80% 160%% 9.00% 800.00 $600.00 $400.00 5643.21 55165x2 5462.20 366. 5870.51 $678.0 597.98 507.74 240 0 $316.40 $284.48 VALUATION Textiles wool wur Sateen 23#24Market capitalization composition - CSE Of the LKR 4,547.6Bn total market capitalization, LKR 211.6Bn, accounting for 5%, is held by Consumer Services (Hotels) sector. Top 5 counters leading market capitalization in Consumer Services sector Diversified Financials Capital Goods 16% 16% Banks 10% Transportation 6% Food, Beverage & Tobacco 22% Other Sectors 9% *Data as of 18th Sep 2023 Telecommunication Services 5% 4.5% KHL 4.7% 16.4% AHPL Consumer Services AHUN 5% TRAN Materials 4% 12.5% GHLL Insurance 4% Food & Staples Retailing 3% 13.2% First Capital A Janashakthi Group Company Source: CSE 24 +4#250% BRR GHLL 50% RENU *Data as of Mar 2023 100% RCH NEH SERV RPBH RFL | TANG HSIG RHTL AHPL ☐ КНС PEG ☐ LHL TRAN SHOT SHOT.X CHOT STAF MRH SIGV CITH The sector, despite high gearing and the impact of high interest rates, found relief through extended debt moratoriums 400% Between 2018 and 2022, the tourism sector's exposure to banks increased from 4.8% to 6.2% of total gross loans. During this period, total gross loans and advances in the banking sector grew by 50%, while advances and penalties to the tourism sector surged by 95%, notably increasing by 31% in 2022. The tourism sector benefitted from a debt moratorium scheme initiated in mid-2020 due to the pandemic. This scheme continued until 30th Jun 2022, with multiple extensions. Nevertheless, the sector faced challenges due to high inflation and increased electricity tariffs, which added pressure to hotels' working capital requirement. Amidst a high-interest rate environment, several listed hotels have taken steps to fund their working capital and refurbishment requirements through rights issues. The escalation in working capital requirements have contributed to the increased gearing of listed hotels Debt to Equity ratio (%) 350% 300% 250% 200% The Gearing ratio is used to assess a company's financial leverage by comparing its debt to its equity, which helps to evaluate risk profile and financial stability of the firm. High debt may indicate a need for capital infusion in terms of Rights issue 150% 700.00 600.00 500.00 400.00 300.00 Operating CF/EBITDA The Operating Cash Flow (OCF) to EBITDA ratio is used to assess a company's ability to convert its EBITDA into actual cash flow from operations, providing insights into its financial health and cash flow quality. A higher ratio indicates that a company is more efficient at converting its operating earnings into cash from its core operations, which is generally considered favorable as it suggests better cash flow generation and financial health. However, a negative cash flow or tight liquidity may suggest the need for additional capital. (100.00) BERU 100.00 200.00 TRAN BBH KHC REEF CHOT HSIG STAF MARA | RCH SERV CITH LHL AHPL TANG AHUN RFL Source: CBSL, Bloomberg, First Capital Research 25 RPBH EDEN PALM First Capital A Janashakthi Group Company#26First Capital A Janashakthi Group Company The Price-to-Sales (P/S) ratio is primarily used to assess a company's valuation by comparing its stock price to its revenue, to determine whether a stock is overvalued or undervalued. A lower P/S ratio suggests potential undervaluation, indicating that investors are paying less for each rupee of a company's revenue. Price to Sale (x) AHUN, PALM and REEF has the lowest Price to Sales 24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 Industry Average: 4.4x CONN MARA RPBH TANG CITW LHL BERU KHL TRAN JETS BBH SHOT.X AHPL EDEN HSIG SIGV NEH STAF SHOT RFL CHOT RHTL BRR GHLL RCH RENU KHC HSIG KHL MRH SHOT.X RFL GHLL SIGV AHUN Source: Bloomberg, First Capital Research RHTL SHOT TRAN JETS MARA CONN BRR SERV 70% of the Hotels are trading below the industry Price to Book value 12.00 10.00 8.00 6.00 4.00 Industry Average: 1.3x 2.00 Price to Book value (X) The Price-to-Book Value (PBV) ratio is primarily used to assess whether a stock is undervalued or overvalued by comparing its market price (P) to the book value of its assets per share (NAVPS). A lower PBV ratio typically indicates that a stock is potentially undervalued or trading at a discount relative to its book value. AHUN PALM REEF PEG MRH CITH TAJ SERV RENU PALM RCH CITH TANG PEG CHOT LHL RPBH EDEN STAF NEH REEF CITW AHPL KHC 26#27First Capital A Janashakthi Group Company CHOT AHUN 350 300 250 200 150 100 50 SERV TRAN 0 AHPL KHL RHTL TAJ JETS NEH CHOT EDEN KHL RCH BBH PALM AHPL RHTL EDEN LHL REEF AHUN SERV JETS TRAN CITW KHC REEF CITH TAJ BRR SHOT SHOT.X NEH AHUN, KHL, and AHPL, with the largest number of rooms, have significant potential for performance upgrades Enterprise value per room The Enterprise value per room (EV per room) ratio used to evaluate the overall value of a hotel based on its market capitalization, debt, and the number of rooms it operates. A high EV per room indicates that a hotel has a higher valuation for each room it operates when considering both its market capitalization and debt and suggests that investors have high expectations for the company's future performance. PEG CITH CITW RPBH BBH MRH CONN SHOT LHL GHLL CONN RENU STAF BERU MARA Source: CBSL, Bloomberg, First Capital Research PEG RFL MRH RPBH SIGV HSIG TANG City hotels lead in RevPAR amidst high ARR 50.00 45.00 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 Annual Revenue per room (LKR Mn) The Annual Revenue per Room (RevPAR) ratio measures a hotel's revenue generation efficiency on a per-room basis. The highest RevPAR indicates the highest amount of revenue generated by a hotel for each individual guest room or accommodation unit within the financial year. RevPAR is calculated by dividing annual revenue by the total number of rooms available in the period being measured. SHOT.X STAF MARA BRR TANG HSIG PALM RCH BERU GHLL RFL RENU SIGV I KHC 27#28F FCR Recommendations: Hotel Sector First Capital FIRST CAPITAL RECOMMENDATIONS: HOTEL SECTOR A Janashakthi Group Company Stock Stock Code Share price 22.08.2023 Target Price Target Price 2023E/FY24E 2024E/FY25E 52-week High 52-week Low Capital gain (%) FY25E Annualized return (%) FY25E EPS FY25E Forward PER No.of Rooms EV per room FCR Recommendation LKR LKR LKR LKR LKR LKR (x) Aitken, Spence Hotels AITKEN SPENCE HOTEL HOLDINGS PLC AHUN.N 79.60 80.00 105.00 90.00 48.00 31.9% 20.1% 7.0 11.4 2,627.00 35.09 BUY Cinnamon HOTELS & RESORTS JOHN KEELLS HOTELS PLC KHL.N 23.40 26.00 35.00 24.70 14.60 49.6% 30.6% 2.3 10.2 1,476.00 58.95 BUY Hayleys LEISURE Jetwing LIGHTHOUSE HAYLEYS LEISURE PLC CONN.N 25.60 32.00 40.00 28.00 18.00 56.3% 34.4% 5.0 5.1 418.00 11.78 BUY THE LIGHTHOUSE HOTEL PLC LHL.N 34.40 40.00 50.00 39.80 23.00 45.3% 28.1% 3.3 10.4 90.00 22.22 BUY GALLE SRI LANKA OOO THE FORTRESS RESORTS PLC THE FORTRESS RESORT & SPA RHTL.N 20.40 25.00 32.00 23.50 13.20 56.9% 34.7% 2.1 9.7 53.00 36.58 BUY ROYAL PALMS BEACH HOTELS PLC RPBH.N 29.50 35.00 46.00 34.80 20.10 55.9% 34.2% 3.5 8.4 136.00 8.42 BUY ROYAL PALMS BEACH HOTEL SERENDIB LEISURE SERENDIB HOTELS PLC SERENDIB LEISURE DOLPHIN HOTELS PLC Cinnamon SHOT.N 14.10 12.50 20.00 20.00 7.30 41.8% 26.1% 1.1 12.8 341.00 19.29 BUY STAF.N 35.40 42.00 55.00 39.80 25.20 55.4% 33.9% 4.6 7.7 154.00 13.18 BUY ASIAN HOTELS AND PROPERTIES PLC AHPL.N 61.00 55.00 86.00 64.50 31.50 41.0% 25.5% 5.7 10.7 GRAND Colombo 847.00 39.79 BUY Source: Bloomberg, First Capital Research 28#29AITKEN SPENCE HOTEL HOLDINGS PLC AHUN.N0000 Current Price: LKR 79.60 AHUN is a 74.5% owned subsidiary of Aitken Spence (SPEN.N0000) It is the largest room key operator in the country with operations in Sri Lanka (1,295rooms in 8 properties & 116 rooms in 1 managed properties), Maldives (735 rooms in 5 properties), Oman (150 rooms in 1 owned property and 191 rooms in 2 managed properties) and India (140 rooms in 1 owned property). AHUN records a higher loss of LKR 2.2Bn in 1QFY24 compared to LKR 0.9Bn in 1QFY23 Despite the gradual recovery in both Sri Lankan and South Asian and Middle East segments, AHUN reported a net loss of LKR 2.2Bn in 1QFY24 amidst the significant rise in the net operating cost recording at LKR 7.3BBn in 1QFY24. Accordingly, operating profits turned into losses and fell by 98.3% YoY to LKR 589.4Mn during the quarter compared to 1QFY23. In the midst of high interest rate environment, net finance cost of AHUN witnessed a steep rise of 29.9% YoY to LKR 1.3Bn which hampered the profit growth of AHUN. Relatively faster recovery in South Asian and Middle East Sector to aid AHUN in outperforming peers Generating over 85.5% of revenue from outside Sri Lanka, AHUN is expected to benefit from relatively faster recovery in tourism in peer countries. Taking in to consideration the expected economic recovery and the looming tourists arrivals along with the global economic recovery, we anticipate earnings to soar for FY24 at 1.7Bn and for FY25 at LKR 2.4Bn respectively. BUY Fair Value: LKR 105.00 (FY25E) BUY P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E EBIT Net Profit 19,055 2,735 811 18,588 5,592 1,564 -5,189 -625 -4,669 24,571 4,280 624 1,685 45,060 51,098 58,944 71,662 7,311 8,527 8,646 12,614 -288 2,360 4,567 Adjusted EPS (LKR) YoY Growth (%) 2.4 (1.9) (13.9) 1.9 (0.9) 5.0 7.0 13.6 -180% -632% 113% 146% 685% 40% 93% Valuations PER (x) PBV (x) DPS 33.6x N/A N/A 42.9x N/A 15.9x 11.3x 5.9x 1.3x 1.3x 1.7x 1.3x 1.3x 1.2x 1.1x 1.0x 1.0 1.0 2.5 5.4 1.3% 0.0% 0.0% 0.0% 0.0% 1.3% 3.1% 6.8% Dividend Payout 42.3% 0.0% 0.0% 0.0% 0.0% 20.0% 35.0% 3.7% -3.1% -29.4% 3.1% -1.4% 7.5% 9.9% 40.0% 17.1% DY (%) ROE PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 1,685 2,360 336 336 EPS 5.0 7.0 Expected Average PER 16.0x 15.0x Target Price 80 105 First Capital A Janashakthi Group Company 29#30JOHN KEELLS HOTELS PLC KHL.N0000 Current Price: LKR 23.40 Fair Value: LKR 35.00 (FY25E) BUY P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 11,033 1,087 9,712 -764 3,661 -4,777 13,355 28,835 -190 1,742 34,921 3,667 42,647 61,599 6,056 9,240 817 -1,201 -5,096 -1,203 -321 1,693 3,395 5,700 0.6 (0.8) (3.5) (0.8) (0.2) 1.2 2.3 3.9 -247% -324% 76% 44% 427.6% 100.5% 67.9% 41.7x N/A N/A N/A N/A 20.1x 10.0x 6.0x 1.2x 1.2x 1.4x 1.1x 1.0x 1.0x 0.9x 0.8x 0.2 0.2 0.4 0.8 0.6% 0.0% 0.0% 0.0% 0.0% 0.7% 1.8% 3.3% Dividend Payout ROE 26.7% 0.0% 0.0% 0.0% 0.0% 15.0% 18.0% 20.0% 2.8% -4.2% -20.9% -4.0% -1.0% 5.0% 9.2% 13.8% 80.3% owned Subsidiary of Premiere John Keells Holdings John Keells Hotels PLC is one of Sri Lanka's largest hotel operators, with a portfolio of 12 resorts across Sri Lanka (1,022 rooms) and Maldives (454 rooms) holding 1,476 hotel rooms in total. All of KHL hotels are under the brand of Cinnamon and the latest addition during FY21 was Cinnamon Bentota Beach which was reconstructed targeting the luxury market. Group reopened Hikka Tranz by Cinnamon in FY22 while construction of Cinnamon Red Kandy (216 rooms) was under under construction and was planned to be completed by FY25E. Under the Maldives segment, 4 star hotels were reconstructed/refurbished in FY20 & FY21 with the total of 454 rooms targeting the upper and luxury tourists. Topline drop by 3.3% YoY in 1QFY24 hampers profitability KHL increased its losses during 1QFY24 to LKR 960.4Mn cf. LKR 464.2Mn in 1QFY23 impacted by escalation of costs. The poor bottom-line performance stemmed largely from drop in top-line, which declined by 3.3% YoY to LKR 6.0Bn. Meanwhile, with the rise in costs, GP margins hampered by 530bps to 57.7% largely due to incremental expenses at the Maldivian resort business (primarily due to the delay in lowering fuel prices in-line with the global crude oil prices). Despite the interest rate reduction, net finance cost remained elevated and recorded at LKR 698.2Mn, which further hampered the profitability growth. Tourist arrivals in Maldives surpassed pre-pandemic levels which benefits higher occupancy Maldives segment contributed over 70% of the group's revenue and we expect the contribution of this segment towards the profitability to grow over the coming years due to the speedy recovery of tourism in Maldives which already surpassed the prepandemic levels. On a silver lining, the prospects for the Sri Lankan Resorts segment remain positive as the recovery in the segment grows faster than anticipated which translated to pick up in occupancies at Sri Lankan Resorts segments (55.0% in 1QFY24 cf. 33.0% in 1QFY23). Considering the potential outlook, we expect KHL to reverse losses and to record profit of LKR 3.4Bn in FY25E surpassing the prepandemic earnings. BUY EBIT Net Profit Adjusted EPS (LKR) YoY Growth (%) Valuations PER (x) PBV (x) DPS DY (%) PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 1,693 3,395 1,456 1,456 EPS 1.2 2.3 Expected Average PER Target Price 22.0x 15.0x 26 35 First Capital A Janashakthi Group Company 30#31HAYLEYS LEISURE PLC CONN.N0000 Current Price: LKR 25.60 Fair Value: LKR 40.00 (FY25E) BUY CONN is 67.6% owned subsidiary of export conglomerate Hayleys (HAYL.N) Hayleys Leisure PLC's hotels, resorts, and boutiques consists of 10 properties with 418 rooms, of which 09 are scattered across the resplendent island of Sri Lanka and the other, a luxurious resort in the Maldives. CONN net loss decreased to LKR 134.1Mn in 1QFY24 (1QFY23: loss of LKR 240.7Mn) The improved performance during the quarter was largely on the back of declining finance expenses, which declined by 67.3% YoY to LKR 66.8Mn. Furthermore, group topline for 1QFY24 significantly grew by 91.1% YoY to LKR 578.3Mn whilst gross margin improved to 57.1% from 49.5% in 1QFY23. CONN to witness faster recovery benefitted by occupancies CONN underwent some challenging times during 2021 and 2022 owing to the pandemic which harshly effected the tourists arrivals to meet with a sharp decline. Moving into 2023 resulted by faster than expected recovery in tourism industry, the economy gradually painting its recovery from the global pandemic and the economic downturn influenced by various government strategies and various promotions, the 1QFY24 has shown that the company has gradually recovered from its bottom. CONN's exposure to the Maldives, which has made a remarkable recovery, reaching pre-pandemic levels, along with its presence in the coastal segment of Sri Lanka and boutique-style hotels, leads us to anticipate occupancy levels of 70% in FY24E. Additionally, with the rapid resurgence of arrivals, we expect Average Room Rates (ARR) to increase, boosting margins in the coming years. Therefore, considering the company's potential and the sector's outlook, we have upgraded our forecasted net profit to LKR 358.0Mn from LKR 345.0Mn for FY24 and LKR 535.1Mn for FY25E. Hence, we recommend a BUY rating for the company. Adjusted EPS (LKR) YoY Growth (%) Valuations P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 1,644 1,226 362 777 1,532 2,391 2,789 3,427 EBIT 408 -114 -583 -623 -445 586 683 994 Net Profit 300 -266 -790 -898 -824 316 481 749 5.6 (1.6) (6.7) (7.7) (7.6) 2.9 4.5 6.9 -128% -329% -14% 0% 138% 52% 56% 4.6x N/A N/A N/A N/A 8.7x 5.8x 3.7x 0.7x 0.8x 1.0x 1.3x 2.0x 1.7x 1.4x 1.1x 1.8 0.4 1.3 2.1 DY (%) Dividend Payout ROE 6.8% 0.0% 0.0% 0.0% 0.0% 1.7% 5.2% 8.1% 31.5% 0.0% 0.0% 0.0% 0.0% 15.0% 30.0% 30.0% 16.2% -4.8% -25.2% -37.6% -60.2% 19.3% 24.3% 30.0% PER (x) PBV (x) DPS PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) EPS FY24E FY25E 316 481 108 108 2.9 4.5 Expected Average PER 11.0x 9.0x 32 40 Target Price First Capital A Janashakthi Group Company 31#32THE LIGHTHOUSE HOTEL PLC LHL.N0000 Current Price: LKR 34.40 Fair Value: LKR 50.00 (FY25E) BUY PE 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 850 510 184 427 731 997 1,146 1,429 155 -65 -175 -10 -19 199 252 372 103 -96 -197 -78 -120 101 153 255 Adjusted EPS (LKR) 2.2 (2.1) (4.3) (1.7) (2.6) 2.2 3.3 5.5 -194% -104% 60% 53% 185% 51% 67% 15.4x N/A N/A N/A N/A 15.6x 10.3x 6.2x 0.5x 0.5x 0.5x 0.5x 0.6x 0.6x 0.5x 0.5x 1.3 2.8 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.9% 8.1% Dividend Payout 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 40.0% 50.0% ROE 3.5% -3.0% -6.6% -2.5% -4.3% 3.5% 5.2% 8.2% Leading boutique resort targeting luxury market The Lighthouse Hotel PLC (LHL) operates three unique properties along the southern coast of Sri Lanka. Jetwing Lighthouse, the iconic resort of LHL, is one of the renowned architect Geoffrey Bawa's finest masterpieces overlooking the coastline of Galle and operated with Jetwing's legendary hospitality with 90 rooms. Alongside Jetwing Lighthouse, it also operates a boutique hotel, Jetwing Kurulubedda, with two private dwellings and four rooms, and the trendy, easy-going, select-service Hotel J in Unawatuna. Over 50.0% growth in the top-line resulted in a reduction of the net loss in 1QFY23 LHL achieved remarkable top-line growth of 56.1% YoY, reaching LKR 212.6Mn, driven by a significant increase in tourist arrivals. This revenue growth had a positive impact on the bottom line, as LHL reported a reduced net loss of 44.6% YoY, totaling LKR 24.7Mn in 1QFY24 compared to a loss of LKR 44.5Mn in 1QFY23. However, administrative expenses continued to rise, primarily due to salary adjustments, leading to a substantial 99.0% YoY increase to LKR 137.6Mn. Occupancy rates expected to rise swiftly with higher ARR The global tourism industry made a robust comeback in 2022, given widespread vaccination efforts and the relaxation of international travel restrictions in many countries. Consequently, tourism in Sri Lanka is rebounding faster than expected, with a strong recovery observed in 1H2023. Furthermore, boutique accommodations have the advantage of quickly filling up their occupancy rates while commanding higher ARR. As a result, we anticipate a further 50% improvement in occupancies, with ARR expected to grow at a 3- year forward CAGR of 7.6% between FY23 and FY26E. BUY EBIT Net Profit YoY Growth (%) Valuations PER (x) PBV (x) DPS DY (%) PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 101 153 46 46 EPS 2.2 3.3 Expected Average PER Target Price 18.0x 15.0x 40 50 First Capital A Janashakthi Group Company 32#33THE FORTRESS RESORTS PLC RHTL.N0000 Current Price: LKR 20.40 Fair Value: LKR 32.00 (FY25E) BUY Highly attractive resort targeting upper class tourists The Fortress Resorts PLC, is a luxury boutique hotel in Galle, Sri Lanka which has invested in its subsidiary, La Forteresse (Pvt) Ltd. and La Forteresse (Pvt) Ltd, provides lodging, food, beverage and other hospitality industry related activities. The Company accommodations consists of 53 rooms including fortress room, ocean room, beach room, beach splash room, ocean loft suites and fortress residence suites. Bottom line plunges by 108.6% YoY amidst cost escalations RHTL recorded a decline in bottom line of 108.6% for 1QFY24 recording a loss of LKR 3.5Mn resulted by the high finance and administrative cost increase by 48.1% YoY. Despite the downturn the top line grew marginally by 5.7% YoY to 133.2Mn deriving optimism for its prospects of recovery in the future. Furthermore, Gross Profit margin also displayed a decline YoY recording 59.2% compared to 70.4% in 1QFY23. Bottomline of the company is forecasted to grow at 27% YoY in FY25E. While RHTL remain hopeful of a steady recovery of political stability, the group will continue to strategize accordingly to attract guests, grow business opportunities and create sustainable value for all stakeholders. RHTL's growth strategies for the year 2022 and beyond includes identify niche markets and reach out to the relevant audience through various partnerships with SLH (Small Luxury Hotels of the World). Also, the company is expecting to widen to the Indian market with special focus on the wedding industry. Considering the steady economic recovery RHTL anticipate the operating expenses to ease contributing to a growth in the bottom line. Considering the potential of the company and the heightened tourists arrivals we anticipate a Net Profit target of LKR 186.2Mn and LKR 263.4Mn for FY24E and FY25E, respectively with an improved occupancy of 50%. BUY P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 788 489 75 349 435 599 734 945 206 4 -235 7 -75 168 235 312 210 27 -176 33 -20 186 236 295 1.9 0.2 (1.6) 0.3 (0.2) 1.7 2.1 2.7 -87% -743% 119% 160% 1038% 27% 25% EBIT Net Profit Adjusted EPS (LKR) YoY Growth (%) Valuations PER (x) PBV (x) DPS 10.8x 82.8x N/A 68.4x N/A 12.1x 9.6x 7.7x 1.2x 1.3x 1.4x 1.4x 1.4x 1.3x 1.1x 1.0x 0.5 4.1 0.4 0.4 0.4 DY (%) 4.9% 4.9% 0.0% 0.0% 0.0% 3.3% 4.2% 5.2% Dividend Payout ROE 52.9% 11.3% 405.7% 0.0% 0.0% 0.0% 40.0% 40.0% 40.0% 1.5% -11.0% 2.0% -1.2% 10.4% 11.7% 12.7% PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 186 236 111 111 EPS 1.7 2.1 Expected Average PER 15.0x 15.0x Target Price 25 32 First Capital A Janashakthi Group Company 33#34ROYAL PALM BEACH HOTELS PLC RPBH.N0000 Current Price: LKR 29.50 Fair Value: LKR 46.00 (FY25E) BUY P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 755 618 151 337 671 820 1,127 1,549 132 59 -159 -44 -63 86 192 294 127 69 -129 -22 -107 116 177 247 2.5 1.4 (2.6) (0.4) (2.1) 2.3 3.5 4.9 -45% -286% 83% 379% 208% 53% 40% 11.6x 21.3x N/A N/A N/A 12.8x 8.4x 6.0x 0.6x 0.6x 0.6x 0.5x 0.6x 0.6x 0.6x 0.5x 1.0 1.0 1.1 2.2 3.4% 3.4% 0.0% 0.0% 0.0% 0.0% 3.6% 7.5% Dividend Payout 39.4% 72.2% 0.0% 0.0% 0.0% 0.0% 30.0% 45.0% ROE 5.1% 2.8% -5.4% -0.8% -4.6% 4.7% 6.8% 9.1% Coastal indulgence in the south of Colombo Royal Palms Beach Hotels is located in Kalutara, the south of Colombo with exposure to the coastal region. The hotel has 136 rooms in a range of suits such as deluxe, heritage, executive, rajasthan royal, royal and penthouse. Revenue mainly stems from rooms and food & beverage sales. 28.41% stake of the hotel lies with Tangerine Beach Hotels PLC as at 30th Mar 2023. Top line take a positive turn as tourists arrivals surge RPBH recorded a loss of LKR 43.4Mn in 1QFY24 recording a 370.7% YoY downturn. The decline is mainly attributed by the higher admin expenses that recorded a 39.6% YoY increase to LKR 140.0Mn resulted by the inflationary pressure and poor economic sentiment. Despite the decline in the bottom line, the top line showcased a growth of 15.5% YoY recording LKR 147.6Mn influenced by the improved arrivals mainly attracting the coastal area. Gross Profit margin too showcased a decline of 460bps YoY on the back of increase in cost of sales by 30.6% YoY. However, on a positive note, RPBH recorded a net finance income of LKR 15.3Mn in 1QFY24. Location-specific advantage and upswing in arrivals to favour RPBH We expect occupancy levels of RPBH to significantly improve in the future given the positive developments on the tourism front with reviving arrivals. Accordingly, we estimate occupancy to improve to 55.0% and 60.0% in FY24E and FY25E, respectively while it is expected to gradually return to pre-pandemic levels in FY25E. Furthermore, location-specific advantage of RPBH considering its close proximity to the Colombo city and large attraction for coastal areas too shall favour in expanding the bottom-line of RPBH. As a result, we estimate earnings of RPBH to improve to LKR 115.7Mn (+208% YoY) in FY24E and LKR 177.0Mn (+53% YoY) in FY25E. EBIT Net Profit Adjusted EPS (LKR) YoY Growth (%) Valuations PER (x) PBV (x) DPS DY (%) Target Price PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 116 177 50 50 EPS 2.3 3.5 Expected Average PER 15.0x 13.0x 35 46 First Capital A Janashakthi Group Company 34#35SERENDIB HOTELS PLC SHOT.N0000 Current Price: LKR 14.10 Fair Value: LKR 20.00 (FY25E) BUY Manifold destinations to offer Serendib Hotels PLC is one of the leading hotel groups in Sri Lanka which encompasses its offerings in key attractions of the country such as beach, jungle and lagoon. Avani Bentota resort, Club Hotel Dolphin and Hotel Sigiriya are other prominent hotels owned by SHOT. SHOT also owns a line of boutique hotels such as Lantern boutique hotel, Ubuntu beach villa and Reveal beach house. Revenue of SHOT is predominantly based on accommodation, food & beverage charges and other hotel operations. The hotel currently consists of 361 rooms offered in the range of standard, villas, suite, deluxe rooms and superior rooms. SHOT is a subsidiary of Eden Hotel Lanka PLC, which owns 60.5% of stake as at 31st Mar 2023. Bottomline on a recovering phase SHOT experienced a massive 100.0% YoY growth in the bottom-line recording LKR 4.3Mn during 1QFY24 registering a positive outlook mainly aided by the growth in the top line which was recorded at LKR 438.4Mn recording a 41.2% YoY growth compared to 1QFY23. Despite the upturn in the topline Gross Profit margin experienced a marginal degrowth to 65.3% compared to 71.4% in 1QFY23. Net finance cost brought in a positive impact on the earnings recording a net finance income of LKR 75.7Mn compared to the net finance expense of LKR 182.8Mn in 1QFY23 creating a favourable impact. Diverse destination offerings to unlock growth We expect earnings to recover in the future as tourist arrivals improve resulting in higher occupancy levels and diverse locations to play a major role in uplifting earnings. Hence, we expect occupancy levels to improve to nearly 65% in FY25E. Hence, we estimate the loss to reverse in FY24E and FY25E and record an earnings of LKR 186.0Mn and LKR 342.0Mn respectively. BUY EBIT P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 2,039 1,589 587 636 1,442 2,597 3,209 4,082 215 29 -412 -233 -133 571 770 939 Net Profit Adjusted EPS (LKR) YoY Growth (%) Valuations 39 -138 -456 -560 -452 276 489 666 0.1 (0.3) (1.0) (1.3) (1.0) 0.6 1.1 1.5 -457% -230% -23% 19% 161% 77% 36% 162.4x N/A N/A N/A N/A 22.8x 12.9x 9.4x 2.5x 2.7x 2.9x 2.3x 1.5x 1.4x 1.3x 1.1x DY (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Dividend Payout 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 1.5% -5.9% -20.8% -20.3% -11.1% 6.3% 10.1% 12.1% PER (x) PBV (x) DPS ROE PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) FY24E FY25E 276 489 446 446 EPS 0.6 1.1 Expected Average PER Target Price 20.0x 18.0x 12 20 First Capital A Janashakthi Group Company 35#36DOLPHIN HOTELS PLC STAF.N0000 Current Price: LKR 35.40 Fair Value: LKR 55.00 (FY25E) BUY FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY25E Estimates (LKR 'Mn) 953 729 350 283 576 908 1,201 1,650 172 47 -62 -82 -117 91 264 462 147 44 -33 -25 -103 149 292 437 Adjusted EPS (LKR) 2.3 0.7 (0.5) (0.4) (1.6) 2.4 4.6 6.9 -70% -175% 25% 316% 244% 96% 50% 15.2x 50.3x N/A N/A N/A 15.0x 7.7x 5.1x 1.1x 1.1x 1.1x 0.8x 0.7x 0.7x 0.7x 0.6x 0.7 1.8. 2.8 DY (%) 0.0% 0.0% 0.0% 0.0% 0.0% 2.0% 5.2% 7.8% Dividend Payout 0.0% 0.0% 0.0% 0.0% 0.0% 30.0% 40.0% 40.0% ROE 7.2% 2.1% -1.6% -0.9% -3.3% 4.7% 8.7% 12.0% 4-star inn surrounding the shores of Negombo Club hotel dolphin located in waikkal, Negombo surrounds the Negombo coastal line and is in close proximity to the Katunayake international airport which makes the hotel an ideal location for tourists on a short vacation. STAF is a subsidiary of SHOT which owns 65.18% stake of the hotel. The hotel consists of 154 rooms in the range of superior poolside terrace, sea view room, superior room, seaside villa, sea view villa and junior suite. Pressure on GP margin and high OPEX stir earnings negatively STAF recorded a significant growth in earnings during 1QFY24 registering a 3596.0% YoY to LKR 31.9Mn owing to the progressive tourists arrivals targeting the coastal areas of the country. Adding a favourable spark, the top line too contributed positively as it gained 49.5% YoY to LKR 187.6Mn. Furthermore, Gross profit margin displayed a downturn as it was recorded at 58.7% in 1QFY24 compared to 68.0% in 1QFY23 resulted by the uptick in cost of sale which recorded a 92.4% YoY owing to the inflationary pressure. On a positive note, net finance income recorded a growth of 3359.0% YoY largely contributing to the ascended bottom-line. Positive outlook as industry sees growth With the steady recovery in global tourism as the pandemic has subsided, we expect occupancy levels of STAF to climb up while domestic tourism is also expected to improve with fuel availability and peek seasons coming up leading to a positive outlook for STAF. Furthermore, the hotel's location being in close proximity to the international airport makes the hotel an apt stay for the last days of vacations indicating fast filling up of rooms. Thus, we estimate occupancy to improve to 45% and 52% in FY24E and FY25E, respectively. Therefore, earnings is expected to surge by 244.0% in FY24E, reversing the loss from FY23 and record at LKR 149.0Mn while it is expected to further improve in FY25E to LKR 292.0Mn (+96.0% YoY). Despite relatively low ARR as a result of heavy competition from hotels in the same location we expect rooms to fill up fast with the benefit of the parent company SHOT. BUY P/E 31 March Revenue EBIT Net Profit YoY Growth (%) Valuations PER (x) PBV (x) DPS PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) EPS FY24E FY25E 149 292 63 63 2.4 4.6 Expected Average PER Target Price 18.0x 12.0x 42 55 First Capital A Janashakthi Group Company 36#37ASIAN HOTELS AND PROPERTIES PLC AHPL.N0000 Current Price: LKR 61.00 Fair Value: LKR 86.00 (FY25E) BUY P/E 31 March Estimates (LKR 'Mn) Revenue FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E 7,658 5,560 1,790 EBIT Net Profit 1,083 -28 -1,913 4,095 -407 93 8,417 14,980 2,996 19,129 23,130 4,208 6,014 811 -50 -1,781 -510 -278 1,577 2,536 3,681 1.8 (0.1) (4.0) (1.2) (0.6) 3.6 5.7 8.3 -106% -3474% 71% 46% 668% 61% 45% 33.3x N/A N/A N/A N/A 17.1x 10.7x 7.3x 0.8x 0.8x 0.9x 0.9x 0.9x 0.9x 0.9x 0.8x 1.5 1.0 1.8 3.4 5.8 2.5% 1.6% 0.0% 0.0% 0.0% 2.9% 5.6% 9.5% Dividend Payout ROE 81.9% 2.5% -888.6% 0.0% 0.0% 0.0% 50.0% 60.0% 70.0% -0.2% -5.7% -1.6% -1.0% 5.3% 8.3% 11.6% Asian Hotels and Properties is a 78.6% owned subsidiary of premiere blue-chip John Keells Holdings (JKH.N0000) AHPL comprises of the city hotels segment with 847 rooms and owns two 5-star properties under the flagship brand of (Cinnamon) and 56,988sq.ft shopping mall, Crescat Boulevard. Top-line expanded by 33.0% YoY in 1QFY24 whilst earnings hampered by operating expenses As tourist arrivals surged, AHPL witnessed a remarkable 33.0% YoY growth in its top-line, reaching LKR 2.2Bn in 1QFY24. However, a corresponding 33.1% YoY increase in operating expenses, totaling LKR 707.5Mn, negatively impacted profitability, resulting in a loss of LKR 247.9Mn. Meanwhile, despite a substantial 128.4% YoY rise in borrowings, the gradual decrease in interest rates kept net finance costs stable at LKR 89.9Mn. Anticipated tourism recovery and a revised Minimum Room Rate are expected to boost AHPL's earnings With the surge in arrivals, AHPL's occupancy rates spiked to an impressive 52% in FY23, accompanied by a rise in Average Room Rates (ARR) due to the depreciation of the LKR. As travel restrictions eased and consumer spending shifted from discretionary items to services, coupled with strong banquet sales that reached pre-pandemic levels in 3QFY23, we anticipate AHPL to reverse previous losses and project profitability of LKR 1,576.7Mn for FY24E and LKR 2,535.9Mn for FY25E. Having traded at an average PER multiple of 15.0x during the past 8Yr period, we believe AHPL should re-iterate and trade at a historic average. Hence, we have arrived at a FV of LKR 86.0 for FY25E. Thus, we rate the share BUY Adjusted EPS (LKR) YoY Growth (%) Valuations PER (x) PBV (x) DPS DY (%) PER based Valuation Earnings (LKR 'Mn) No. of Shares ('Mn) EPS Expected Average PER Target Price FY24E FY25E 1,577 2,536 443 443 3.6 5.7 15.0x 15.0x 54 86 First Capital A Janashakthi Group Company 37#38F First Capital A Janashakthi Group Company First Capital Valuation Guide: Hotel Sector Mkt Price (LKR) Shares in Issue Market Cap. Name Consumer Services Symbol 18.09.2023 (Mn) (LKR Mn) Trailing PER (X) 4 Qtr PBV (X) 4 Qtr Trailing EPS NAVPS (LKR) No. of rooms EV per room ASIAN HOTELS AND PROPERTIES PLC AHPL.N0000 63.20 442.8 27,983 N/A 0.9 -0.9 64.7 847 39.8 AITKEN SPENCE HOTEL HOLDINGS PLC AHUN.N0000 78.50 336.3 26,399 N/A 1.4. -3.7 56.3 2627 35.1 BROWNS BEACH HOTELS PLC BBH.N0000 15.80 129.6 2,048 N/A -4.8 -9.4 -3.4 139 46.3 BERUWALA RESORTS PLC BERU.N0000 1.40 600.0 840 N/A -4.3 -0.1 -0.3 136 11.5 BANSEI ROYAL RESORTS HIKKADUWA PLC BRR.NO000 12.80 53.7 688 23.3 2.3 0.5 5.3 30 23.1 CEYLON HOTELS CORPORATION PLC CHOT.N0000 23.30 180.0 4,195 15.5 0.6 3.6 40.7 20 302.5 HIKKADUWA BEACH RESORT PLC CITH.N0000 5.90 284.9 1,681 N/A 0.4 -3.8 13.3 240 24.4 WASKADUWA BEACH RESORT PLC HAYLEYS LEISURE PLC EDEN HOTEL LANKA PLC GALADARI HOTELS (LANKA) PLC HOTEL SIGIRIYA PLC CITW.N0000 3.00 559.9 1,680 N/A 1.0 -1.3 3.0 150 27.6 CONN.N0000 26.80 108.0 2,894 N/A 2.3 -6.1 11.5 418 11.8 EDEN.N0000 14.40 528.0 7,603 N/A 0.8 -8.2 17.8 373 96.5 GHLL.N0000 18.90 500.8 9,466 221.9 1.1 0.1 16.2 450 14.9 HSIG.N0000 47.40 17.6 833 49.9 1.0 0.9 47.2 79 6.4 HUNAS FALLS HOTELS PLC HUNA.N0000 28.00 843.8 23,625 N/A 8.8 -0.5 3.2 33 39.5 JETWING SYMPHONY LIMITED JETS.N0000 10.30 602.2 6,203 N/A 2.0 -0.5 5.3 283 33.7 THE KANDY HOTELS COMPANY (1938) PLC KHC.N0000 9.90 754.3 7,468 N/A 1.0 -0.1 10.1 305 27.5 JOHN KEELLS HOTELS PLC KHL.N0000 23.80 1456.1 34,656 N/A 1.1 -0.6 20.8 1476 58.9 THE LIGHTHOUSE HOTEL PLC LHL.NOOOO 35.80 46.0 1,647 N/A 0.6 -2.2 59.8 90 22.2 MARAWILA RESORTS PLC MARA.N0000 3.20 351.9 1,126 N/A 1.4 -0.1 2.2 160 9.9 MAHAWELI REACH HOTELS PLC MRH.N0000 13.90 47.1 654 N/A 1.3 -4.4 10.9 112 8.7 THE NUWARA ELIYA HOTELS COMPANY PLC NEH.N0000 1748.00 2.2 3,821 29.0 0.8 60.3 2,126.8 147 16.0 PALM GARDEN HOTELS PLC PALM.N0000 44.00 43.3 1,904 N/A 0.5 -118.7 91.4 735 42.8 PEGASUS HOTELS OF CEYLON PLC PEG.N0000 26.80 33.8 905 N/A 0.6 -3.6 53.3 140 9.7 RENUKA HOTELS LTD RCH.N0000 89.90 40.3 3,623 11.9 0.4 7.6 245.7 100 46.8 CITRUS LEISURE PLC REEF.N0000 7.20 267.2 1,924 N/A 0.9 -4.1 7.9 290 24.5 RENUKA CITY HOTELS PLC. RENU.N0000 393.50 7.0 2,755 N/A 0.3 -73.8 1,238.9 100 13.3 RAMBODA FALLS PLC RFL.N0000 28.50 20.0 570 46.8 1.0 0.6 29.4 63 8.8 THE FORTRESS RESORTS PLC RHTL.N0000 20.80 110.9 2,306 N/A 1.4 -0.6 14.5 53 36.6 ROYAL PALMS BEACH HOTELS PLC RPBH.N0000 26.70 50.0 1,335 N/A 0.6 -3.3 46.0 136 8.4 THE KINGSBURY PLC SERV.N0000 12.00 484.0 5,808 N/A 11.4 -0.3 1.1 229 34.9 SERENDIB HOTELS PLC SHOT.N0000 14.80 446.1 6,602 N/A 1.6 -0.1 9.1 341 19.3 SERENDIB HOTELS PLC SHOT.X0000 10.50 446.1 4,684 N/A 1.1 -0.1 9.1 341 19.3 SIGIRIYA VILLAGE HOTELS PLC SIGV.N0000 58.00 9.0 522 N/A 1.1 -14.6 48.5 120 7.2 DOLPHIN HOTELS PLC STAF.N0000 37.10 63.2 2,346 N/A 0.8 -1.1 49.3 154 13.2 TAJ LANKA HOTELS PLC TAJ.N0000 24.00 139.6 3,351 N/A -2.2 -1.6 -10.2 300 24.2 TANGERINE BEACH HOTELS PLC TANG.N0000 61.70 20.0 1,234 N/A 0.4 -12.8 141.5 179 5.1 TRANS ASIA HOTELS PLC TRAN.N0000 50.00 200.0 10,000 N/A 1.7 -0.5 29.4 346 32.6 16 Consumer Services Sector Market Valuations N/A 1.2 11.6 1.0#39DISCLAIMER This Review is prepared and issued by First Capital Holdings PLC based on information in the public domain, internally developed and other sources, believed to be correct. 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E: [email protected] f in Dimantha Mathew Chief Research & Strategy Officer T: +94 11 2639 853 E: [email protected] Ranjan Ranatunga Assistant Vice President - Research T: +94 11 2639 863 E: [email protected] Vinodhini Rajapoopathy Assistant Manager- Research T: +94 11 2639 866 E: [email protected] Tharusha Ashokgar Senior Research Associate T: +94 11 2639 866 E: [email protected] Zaeema Jihan Senior Research Associate T: +94 11 2639 868 E: [email protected] Nethmi Fernando Research Associate T: +94 11 2639 866 E: [email protected]