Asian Hotels & Properties PLC (AHPL.N0000)

Transcription

1 Sri Lanka Hotels and Travels EQUITY RESEARCH Initiation of coverage 2 September 213 Asian Hotels & Properties PLC (AHPL.N) Hospitable investment Asian Hotels & Properties PLC (AHPL), majority owned by John Keells Holdings (JKH), is Sri Lanka s leading five-star city hotelier and a top-2 listed company on the Colombo Stock Exchange (CSE) by market capitalization. Its business currently focuses on two five-star city hotels, Cinnamon Grand Colombo (CGC; 59% of FY13 revenues) and Cinnamon Lakeside Colombo (CLC; 36% of FY13 revenues), and a rental property, Crescat Boulevard and Shopping Mall (CBSM). We forecast AHPL s revenue to grow at a 5.% CAGR over FY14E-FY16E, while its EBIT margin improves 131bps to 32.9% in FY16E. Our growth forecasts are mainly driven by the fact that CGC and CLC will continue their dominance in the five-star city hotel market (through their 37% contribution to the five-star room inventory in Colombo at present) over the next months as we believe new city hotels are scheduled to enter the market only by end 214. Our DCF/SOTP valuation and our relative valuation analyses suggest a share price range of LKR57-79, compared with the share price of LKR69 as of 18 September 213. AHPL s revenue will likely grow at a 5.% CAGR through FY16E. We expect AHPL s revenue growth to be driven primarily by the hotel segment. We forecast a 345bps increase in blended occupancy to 71.2% by FY16E and a 3.5% CAGR over FY14E-FY16E in overall average daily rates to reach LKR2,23 in FY16E. AHPL stands to benefit from the closure of three of its close competitors over the short term, as these hotels have planned refurbishments spanning a period of at least a year. In addition, close to 7% of the new room inventory through new global brands set to enter the city hotel market will only come to fruition during late FY15E; therefore, we believe that AHPL can capitalize on revenue growth over the next two years. We also expect a modest contribution from the property development segment, reflecting revenues from its CBSM property alone, as all apartment projects are complete. We estimate that the EBIT margin will improve 131bps through FY16E. We expect AHPL to post an EBIT margin of 32.9% by FY16E, driven by its dominant position in the domestic city hotel landscape that enables it to command premium prices. In addition, the numerous cost-saving measures that are consciously maintained, together with low operating leverage enjoyed by AHPL, will contribute to EBIT margin growth. A strong net cash position and very low leverage can help expansion. There is no indication at present about planned expansions in hotels or properties, and AHPL is currently focused on maintaining its market leadership position in the industry. Should AHPL decide to expand its operations, it is currently in a strong financial position to grow organically or by acquisition, with a net cash position that is roughly 7% of market capitalization and a negligible amount of debt (gearing stood at 1.7% in 1QFY14). However, we believe any further expansion is unlikely, due to the parent company, JKH, focusing on its five-to-seven year USD65m mega mixeddevelopment project, as well as its JV business hotel project with Sanken Lanka (due to commence operations in FY15E). We establish a valuation range of LKR AHPL currently trades at LKR69, down 15% over the last 12 months. Our DCF/SOTP analysis suggests a valuation range of LKR6-79, inclusive of a potential upside and downside, as explained on pages 4 and 9. Also, our P/E valuation suggests that that AHPL currently trades at an FY14E P/E of 11.1x, an 8.5% premium to its 24-month historical average. Inclusive of a 1% discount and a 1% premium, we establish a P/E range of LKR57-7. Our valuation methodology is discussed in detail on pages In the upcoming quarters, we will closely track AHPL s performance across a number of key areas (listed on page 18), and will update our valuation range in future earnings updates. Key statistics CSE/Bloomberg tickers Share price (18 Sep 213) No. of issued shares (m) Market cap (USDm) Enterprise value (USDm) Free float (%) 52-week range (H/L) Avg. daily vol. (shares,1yr) Avg. daily turnover (USD ) AHPL.N/AHPL SL LKR % LKR85/63 32, Source: CSE, Bloomberg Note: USD/LKR=128.7 (average for the one year ended 18 September 213) Share price movement 13% 11% 9% 7% Sep-12 Nov-12 Feb-13 Apr-13 Jul-13 Sep-13 AHPL ASPI S&P SL 2 Source: CSE, Bloomberg Share price performance 3m 6m 12m AHPL -6.4% -.4% -14.6% S&P SL 2-9.7% -3.8%.5% All Share Price Index -8.2% -.4% -2.5% Source: CSE, Bloomberg Summary financials LKRm (year-end 31 March) E 215E Revenue 7,891 8,853 8,576 EBITDA 2,925 3,371 3,152 Segment results 2,496 2,963 2,783 Net profit 2,494 2,742 2,622 Recurrent EPS ROE (%) P/E (x) Source: AHPL, Amba estimates 1

2 Asian Hotels & Properties PLC Table of Contents AHPL s revenue to grow at a 5.% CAGR over FY14E-FY16E... 3 The hotel segment s revenue growth supported by sustained occupancy levels and an increase in F&B revenue... 3 Upside and downside risks to the hotel segment s revenue... 4 The property development segment to drive modest growth in revenue... 5 EBIT margin to improve to 32.9% in FY16E... 7 We expect the hotel segment s EBIT margin to improve due to increased occupancy and cost-control initiatives... 7 Downside risks to margins... 9 AHPL s net cash position and low debt to support future expansion if required... 1 Strong cash position to allow investments... 1 Low gearing and strong liquidity reduce risks... 1 We establish a valuation range for AHPL shares of LKR DCF/SOTP analysis yields a valuation range of LKR6-79 per share P/E analysis yields a fair value range of LKR57-7 per share P/BV analysis supports our P/E valuation with a range of LKR Relative valuation data used as a measure of comparison Share Price Performance Earnings release focus areas Appendix 1: AHPL in the five-star city hotel industry AHPL holds a dominant position in the five-star city hotel industry, sustainable in the short term Global hotel brands are expected to add over 2, five-star rooms to current inventory in Colombo... 2 Competitors in the five-star hotel segment have started to respond to increased competition forecasts Appendix 2: Company overview AHPL s business segments Management strategy, transparency and governance Shareholding structure Board of directors Appendix 3: Key financial data... 3 Summary group financials (LKRm)... 3 Key ratios Segmental summary Appendix 4: SWOT analysis Fact Sheet Sri Lanka investment environment overview

3 AHPL s revenue to grow at a 5.% CAGR over FY14E-FY16E In our explicit forecast period, we expect AHPL s hotels to extend their dominant position in the five-star Colombo city hotel market and revenue to grow at a 5.% CAGR over FY14E-FY16E to reach LKR8.9bn in FY16E. Revenue in 3QFY14E will see an increase on account of the forthcoming Commonwealth Heads of Government Meeting (CHOGM) to be held in November 213. We estimate that revenue from this week alone (12-17 November) will contribute approximately 9% to the hotel segment s 3QFY14E revenue, and roughly 3% to AHPL s FY14E hotel segment revenue. Figure 1: AHPL s revenue to grow at a 5.% CAGR over FY14E-FY16E LKRm 1, 9, 8, 7, 6, 5, 4, FY1 FY11 FY12 FY13 FY14E FY15E FY16E AHPL revenues Source: AHPL, Amba estimates The hotel segment s revenue growth supported by sustained occupancy levels and an increase in F&B revenue Cinnamon Grand Colombo (CGC) We expect CGC s revenue to grow at a 5.9% CAGR over FY14E-FY16E. We believe CGC s room revenue will grow at a 5.6% CAGR over FY14E-FY16E, supported by increasing occupancy rates (up 41bps from FY13 levels to 76.5% in FY16E) and higher average daily rates (ADRs), growing at a 3.7% CAGR over FY14E-FY16E. These assumptions are supported by AHPL s market leader position (with 37% of room inventory in Colombo) and its resulting ability to command higher room rates. Another supporting factor is that new city hotels (with the exception of Sheraton and Hyatt, expected to launch in 214) are only expected to come into operation in 216E-217E. We also expect CGC to maintain its occupancy levels post FY16E, based on the assumption that additions to room inventory may not exceed demand for such rooms in Colombo. CGC s main competitor, Hilton Colombo (second in terms of revenue in the industry) will place its operations on hold in December 213 for refurbishments for a year, providing an immediate opportunity for CGC to increase occupancy. In addition to room revenue, we forecast a 6.6% CAGR over FY14E-FY16E for food and beverage (F&B) revenue, driven mainly by its image as the preferred location for banquets and meetings, incentives, conferences and exhibitions (MICE) events, and its 13 restaurants that offer a wide variety under one roof. CGC saw a 19.3% CAGR over FY1-FY13 in non-room revenue, compared with a domestic peer average of 15.3%. Further, this hotel served over 96, covers in FY13 (the highest number of F&B covers in the industry, as stated in AHPL s FY13 annual report), with over 2% of these comprising banquet (wedding) covers. GCG also has the highest number of F&B options among city hotels in Colombo and offers the highest number of buffet options in Colombo. Cinnamon Lakeside Colombo (CLC) We expect CLC s revenue to grow at a 4.6% CAGR over FY14E-FY16E as it increases its visibility under the Cinnamon brand. This growth is primarily AHPL revenues to be driven primarily by the hotel segment, with higher occupancy levels and ADRs anticipated in the short term 3

4 driven by room revenue, which we forecast to grow at a 4.6% CAGR over FY14E-FY16E, while occupancy increases to 63.5% in FY16E from 6.% in FY13. We forecast ADRs to increase at a 3.2% CAGR over FY14E-FY16E. Thus, we assume that CLC may move closer towards being recognized as the best alternative to CGC in Colombo, among other five-star hotels. Similar to CGC, we believe CLC could continue to capitalize on marketing synergies available to AHPL s hotels that come under the JKH umbrella and bookings that would not be catered for by peers closing down for refurbishment. CLC will benefit from the partial refurbishment closure of Galle Face Hotel (its main competitor, which will be closed for almost two years), which we believe could potentially add to occupancy levels. CLC has also grown in popularity for banquet events, which grew 18% YoY in FY13 to 1,98 events, including 37 weddings. This is substantiated by its non-room revenue CAGR of 2.4% over FY1-FY13, compared with the 15.3% domestic peer average. We forecast non-room (F&B) revenue to grow at a 5.4% CAGR over FY14E-FY16E. Figure 2: Occupancy at CGC to increase 41bps in FY16E. Average daily rate to post a 3.7% CAGR over FY14E-FY16E Figure 3: Occupancy at CLC to increase 35bps in FY16E. Average daily rate to post a 3.2% CAGR over FY14E-FY16E 8% LKR 25, 7% LKR 25, 75% 2, 6% 2, 7% 15, 5% 15, 65% 1, 4% 1, 6% 5, 3% 5, 55% FY1 FY11 FY12 FY13 FY14E FY15E FY16E 2% FY1 FY11 FY12 FY13 FY14E FY15E FY16E Occupancy (LHS) ADR (RHS) Occupancy (LHS) ADR (RHS) Source: AHPL, Amba estimates Source: TRAN, Amba estimates Upside and downside risks to the hotel segment s revenue Development possibilities of the current hotels There is an option of CGC and CLC developing further within their respective premises to increase room inventory and F&B venues over the medium-to-long term. We believe that the JKH group, the parent company of AHPL, is more focused on its recently announced USD65m mixed-development project, in addition to a 24-room JV business hotel project scheduled to be completed by August 214, which leads us to believe that any expansion to the existing properties will be carried out once these projects are complete, and only if AHPL can identify significant demand. In-house destination management (DM) operations AHPL s hotels benefit from being a part of integrated holiday packages promoted by in-house tour operators such as Walkers Tours and Mackinnons Travels, and domestic leisure airline Cinnamon Air (also owned by JKH). At present, CGC and CLC generate 25% of room sales through travel firms owned by the JKH group, 2% from external tour operators, 5% from airline crew, and the rest through the corporate and MICE segments. Additionally, the hotel brands Cinnamon and Chaaya have a global marketing reach and are recognized as Sri Lankan brands, which AHPL can benefit from. Up-coming mixed development projects The new casino-integrated projects set to enter the industry in the long-term could generate additional revenues for AHPL hotels, through the influx of a larger number of tourists, which could lead to full-capacities at the up-coming integrated (mixed development) hotel complexes. This could result in a spill-over effect, as these tourists look for alternative accomodation, which could benefit AHPL. Further expansions, in-house DM operations and mixed development projects could lead to further upside revenue potential 4

5 Macro-level industry challenges While tourist arrivals to Sri Lanka have doubled from 29 levels (pre-war end), with the 212 number at approximately 1m arrivals (up 17% YoY), this still lags those of comparable countries in Southeast Asia. For example, the Philippines recorded 4.3m tourist arrivals (up 9% YoY), Vietnam received 6.8m arrivals (up 13% YoY) and Indonesia reported 8.m arrivals (up 11% YoY). Sri Lanka s tourism industry is in the process of upgrading its infrastructure in terms of roads, airports, transportation and services to compete with its regional peers, and also to cater to the anticipated influx of tourists over the next four to five years (the government targets 2.5m tourist arrivals by 216E). However, the country s price levels are still relatively uncompetitive compared with its regional peers. We believe that, once around 9% of the additional room inventory capacity (through upcoming hotel projects) enters the domestic market from 216E onwards, AHPL will experience pressure on its premium pricing, should competitors value propositions be superior to AHPL s (as discussed in detail in Appendix 1). However, it is unclear at the moment as to what price levels will be introduced by the new players in the industry and the future of the minimum rate rule discussed in Appendix 1. Regional competitors value propositions could lower our revenue forecasts Figure 4: AHPL s room inventory to remain flat, while tourist arrivals may post a 28.% CAGR over FY14E-FY16E 1,6 1, E 215E 216E 3,, 2,5, 2,, 1,5, 1,, 5, - AHPL room inventory (LHS) Tourist arrivals (RHS) Source: AHPL, Sri Lanka Tourism Development Authority, Amba estimates Note: Room inventory numbers are for the 12-month period ended 31 March of each year The property development segment to drive modest growth in revenue The property development segment currently owns the Crescat Boulevard and Shopping Mall (CBSM), a rental property, through which it generates 5% of AHPL s total revenue. Following the completion of all its apartment projects (The Emperor and The Monarch) by FY13, this segment will generate revenue from CBSM alone in FY14E and beyond. This results in a 23.5% drop in overall revenue in FY14E. We forecast revenue from CBSM alone to grow at a 15.5% CAGR over FY14E-FY16E, driven by a gradual increase in rental income per store (which we estimate will increase in line with inflationary levels). This should be supported by rising consumer spending and GDP growth in the country. CBSM recorded a 6% YoY increase in the number of visitors in FY13 and we expect this to gather pace in line with the rise in occupancy levels at CGC over FY14E- FY16E. We note that occupancy levels are at approximately 1%, with additional rental income only possible through an expansion, which seems unlikely, even though there is space to accommodate such an expansion. Property development segment to contribute modestly to group revenues, purely through CBSM s rental income 5

6 Figure 5: Revenue from CBSM to post a 15.5% CAGR over FY14E-FY16E, as apartment revenues have been fully realized LKRm 2,8 2,4 2, 1,6 1, FY11 FY12 FY13 FY14E FY15E FY16E CBSM Apartments Source: AHPL, Amba estimates 6

7 EBIT margin to improve to 32.9% in FY16E The hotel industry is faced with a high fixed cost base, owing to electricity and labor costs, which must be maintained even during periods of low occupancy, and which are increasingly on an upward trend. Our research indicates that, on average, 6% or more of total expenses are made up of fixed costs. We forecast AHPL to improve its EBIT margin to 32.9% in FY16E from 31.6% in FY13, driven mainly by an improved performance across its city hotels, supported by aboveaverage pricing and cost reductions. Figure 6: AHPL s EBIT to post a 6.5% CAGR over FY14E-FY16E 3,5 3, 2,5 2, 1,5 1, 5 - FY1 FY11 FY12 FY13 FY14E FY15E FY16E 4% 35% 3% 25% 2% 15% 1% 5% % EBIT Margin (RHS) EBIT (LHS) Source: AHPL, TRAN, Amba estimates We expect the hotel segment s EBIT margin to improve due to increased occupancy and cost-control initiatives We forecast the hotel segment s EBIT margins to improve 222bps to reach 33.1% in FY16E, from 3.9% in FY13E, supported by its hotels higher pricing levels, economies of scale achieved by increase in occupancy as a result of competitors closure, and several cost-control and cost-saving initiatives that should help stabilize cost levels and improve margins. Figure 7: CGC and CLC to post steady growth in EBIT margins EBIT margin 45% 4% 35% 3% 25% 2% FY11 FY12 FY13 FY14E FY15E FY16E CGC CLC Source: AHPL, TRAN, Amba estimates 7

8 The hotel industry is plagued by concerns over a significant increase in overhead costs. One area for concern across the industry is the recent hike in electricity tariffs (effective from 1 April 213), which we believe can be factored into room rate revisions, as AHPL s hotels can command a premium due to strong brand positioning. Increasing labor costs is another area of concern within the industry, especially due to the significant shortage of trained labor and a potential increase in the minimum wage law for hotel employees. However, in AHPL s FY13 annual report, management states that AHPL s hotel employees are already being paid higher than the minimum wage, meaning that the minimum wage rule bears modest risk to AHPL in our forecast period. However, over the medium-to-long term, we expect AHPL to experience a rise in labor costs, as the supply of trained labor could fall significantly short of demand created by new hotel establishments. AHPL s hotels have also invested in cost-saving initiatives, which include the installation of energyefficient water pumps, the adoption of LED lighting to reduce energy costs and the installation of rain water collection tanks. We believe these measures can help offset rises in other direct costs and keep overheads at manageable levels, thereby contributing to EBIT margin growth. AHPL s hotels have also steadily maintained lower operating leverage relative to peers, as indicated in the chart below. Its average three-year operating leverage ratio stood at 31%, less than half its peer average of 68%. This further substantiates AHPL s efforts to maximize cost savings and reiterates its dominant margin position within Sri Lanka s city hotel industry. Strong operating leverage metrics, cost-saving measures and internal efficiency to improve EBIT margin, despite rise in electricity and labor costs Figure 8: AHPL has lower operating leverage compared with its peer average Operating leverage 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % FY11 FY12 FY13 AHPL Galadari HD PLC (Hilton Colombo) HSC PLC (Kingsbury) Taj Lanka CHC(Galle Face Hotel) Peer average (RHS) 6% 5% 4% 3% 2% 1% % Source: AHPL, Galadari, Hotel Developers PLC (HD PLC), Hotel Services Ceylon PLC (HSC PLC), Taj Lanka Hotels PLC, Ceylon Hotels Corporation (CHC) We forecast CGC s EBIT margin to improve 275bps from FY13 levels to reach 34.% in FY16E, supported by the cost-saving measures in place to offset increases in other costs. The closure of Hilton Colombo and the resulting increase in occupancy for CGC will also help to maintain AHPL s margins. While labor costs may not have a material impact during our forecast period, the impact of energy costs will be a focal point going forward. However, we expect growth in revenue and aboveaverage pricing to help offset any significant impact. Our forecasts estimate CLC s EBIT margin to improve to 31.5% in FY16E (a 13bps increase from FY13), supported by overall growth in occupancy and popularity for MICE. Partial closure of Galle Face Hotel, as mentioned earlier, would help to drive occupancy levels over the short term, which should add to the overall improvement in AHPL s margins. We expect the same trend as for CGC in terms of labor and energy costs. 8

9 AHPL will also benefit from a distinct competitive advantage, as it is the first city hotel to complete its refurbishment cycle, ahead of its competitors. This will allow AHPL to benefit from higher margins through premium ADR rates over the next two years. Downside risks to margins Refurbishment cycles Although AHPL has completed its refurbishment cycle, downside risks to margins include the five-to seven-year medium and major refurbishment operations that form a part of AHPL s regular strategy cycle. The expiration of CGC s tax holiday The 18-year tax holiday (which commenced on 1 April 1996) enjoyed by CGC, owing to the merger between Asian Hotels Corporation Ltd and Crescat Developments Ltd, will expire in FY14E. We expect this to result in higher effective income tax rates for AHPL (which stood at approximately 7% in FY13). We believe that this could impact net profits attributable to equity holders going forward. An upcoming business hotel JV with Sanken Lanka set to launch in August 214 Although this is within the JKH group itself, the no-frills approach of the new hotel could provide some level of competition to AHPL s hotels, particularly as CGC and CLC target a large proportion of business clientele. The lack of new apartment projects Margins from the property development segment are volatile, peaking in years where there are large volumes of apartment sales and falling when few units are sold. As both of AHPL s key property development projects (The Emperor and The Monarch) are completed, the contribution to margins from this segment is marginal through our forecast period, comprising solely of the margins from CBSM. Competition, lack of new project ventures could dampen margin growth 9

10 AHPL s net cash position and low debt to support future expansion if required Strong cash position to allow investments AHPL has maintained a strong net cash position relative to its domestic peers, with cash and cash equivalents making up approximately 8.% of market capitalization and 9.4% of total assets as of 1QFY14. Figure 9: AHPL has maintained a strong net cash position relative to most of its peers LKRm 2, 1,5 1, 5 (5) (1,) AHPL Galadari HD PLC (Hilton Colombo) HSC PLC (Kingsbury) Taj Lanka CHC(Galle Face Hotel) Source: AHPL, Galadari, Hotel Developers PLC (HD PLC), Hotel Services Ceylon PLC (HSC PLC), Taj Lanka Hotels PLC, Ceylon Hotels Corporation (CHC) Note: All data as of 1QFY14 The company also has been able to generate free cash flows (FCF) of over LKR2bn over the past two years, with an FCF yield of 7.1% in FY13, compared with a peer average of 1.2% (amongst the city hotels in Sri Lanka as taken from our peer group, as shown in Figure 16). Low gearing and strong liquidity reduce risks AHPL s negligible gearing position has declined over the years, falling to.7% in FY13 from 8.2% in FY8. The 1QFY14 figure stood at 1.7%. These ratios support a significantly low financial leverage position for the company. AHPL s strong liquidity position is further evident through its current ratio, which has shown constant improvement, increasing to 3.6x in FY13 from 1.7x in FY8. AHPL s balance sheet metrics are strong, with a net cash position and low gearing Figure 1: AHPL s gearing levels almost negligible relative to peers Figure 11: AHPL s liquidity position has been strengthening continuously 5% 4% 3% 2% 1% % AHPL Galadari HD PLC (Hilton Colombo) Gearing HSC PLC Taj Lanka CHC(Galle (Kingsbury) Face Hotel) FY8 FY9 FY1 FY11 FY12 FY13 Current ratio Source: AHPL, Galadari, Hotel Developers PLC (HD PLC), Hotel Services Ceylon PLC (HSC PLC), Taj Lanka Hotels PLC, Ceylon Hotels Corporation (CHC) Source: AHPL 1

11 These factors put AHPL in a position to easily finance any potential expansions to its hotels, as internally generated funds could be used, in addition to external debt funding, which we assume can be obtained fairly easily and at attractive rates. As a part of JKH, AHPL is in a position to borrow at a relatively lower cost to fund large-scale capital requirements, should the need arise. 11

12 We establish a valuation range for AHPL shares of LKR57-79 We establish a 12-month valuation range of LKR57-79 per share, based on our current earnings outlook for AHPL shares, compared with the current share price of LKR69 as of 18 September 213. We arrive at our valuation range applying scenario analysis to a DCF/SOTP valuation methodology, and using P/E and P/BV-based relative valuation approaches. For comparison, we also assess AHPL s valuation levels relative to a group of peers. For factors that will provide an upside/downside to this stated valuation range, please refer to pages 4 and 9 of the report. Figure 12: Valuation range analysis provides a range of LKR57-79 per share (current share price LKR69) DCF/SOTP (sensitivity analysis) P/BV analysis P/E analysis (scenario analysis) week range Source: AHPL, Bloomberg, Amba estimates DCF/SOTP analysis yields a valuation range of LKR6-79 per share In valuing AHPL shares, we applied a combined DCF/SOTP approach. For the hotels, our base-case assumption of a risk-free rate of 1.7% and a market risk premium of 5.% yield a value per share of LKR67. Adjusting these assumptions (to allow for bull- and bear-case scenarios) implies a valuation range of LKR6-79. We have added the asset value of the property development segment to the DCF (AHPL constantly re-values its property, which we assume is the current fair value) to arrive at our final share price range. Other elements of our valuation approach include the following: AHPL s current capital structure comprises 7% debt and 93% equity. We have assumed a 1% debt and 9% equity target capital structure. Figure 13 reflects our DCF/SOTP assumptions for the hotel segment. We have estimated the following: EBIT and FCF figures throughout the explicit and fade periods Terminal value at FY22E, calculated by applying a terminal growth rate to unleveraged FCF, as of FY22E Finally, we arrived at our segmental EV by discounting the unleveraged FCF values over the explicit and fade periods at the segmental WACC. Our base-case assumptions include a risk-free rate of 1.7% and a market risk premium of 5.% 12

13 Figure 13: Amba DCF/SOTP assumptions schedule (base case) WACC assumptions FY14E (LKRm) Target capital structure 1/9 EBIT total 2,845 Cost of equity 16.% FCF 2,499 Cost of debt 1.% Terminal value (undiscounted) 3,562 Growth rate 2.% Equity valuation of property (CBSM) 8,49 Effective tax rate 1.% EV 29,85 WACC 15.3% Source: Amba estimates Note: All figures are in LKRm unless otherwise stated Taking into consideration the upside and downside risks discussed on pages 4 and 9, we arrived at bull- and bear-case scenarios (shown in Figure 14) to establish our valuation range of LKR6-79. As per these assumptions: Bull-case scenario: The potential upside we estimate for FY14E assumes a 2% increase in occupancy levels, ADR (USD) and YoY growth rates in non-room revenues in the hotel segment compared to our base-case estimates. This would lead to a 16.8% YoY growth in hotel segment revenues (compared with 2.8% in FY13) and 14.9% YoY for AHPL (compared with -1.9% in FY13). We also assume a.5% upside to the base-case EBIT margin. Bear-case scenario: The potential downside we estimate for FY14E assumes a 2% decline in occupancy levels, ADR (USD) and YoY growth rates in non-room revenues in the hotel segment compared to our base-case estimates. This would lead to a 11.3% YoY growth in hotel segment revenues (compared with 2.8% in FY13) and 9.8% YoY for the group. We also assume a.5% decrease in the base-case EBIT margin. Figure 14: Hotel segment scenario analysis assumptions Hotel segment Base case Bull case Bear case FY13 FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E Room revenue 3,813 4,69 4,16 4,446 4,85 4,646 5,6 4,558 4,17 4,38 YoY growth (%) 28.6% 23.% -11.3% 6.9% 27.2% -4.2% 8.9% 19.5% -9.9% 4.9% Occupancy rates 67.7% 72.6% 69.4% 71.2% 73.6% 71.4% 73.2% 7.6% 67.4% 69.2% ADR (LKR/day) 18,27 2,95 19,39 2,23 21,34 21,52 22,361 2,868 19,713 2,318 YoY growth (%) 21.5% 14.8% -7.2% 4.2% 17.% -1.2% 6.2% 14.6% -5.5% 2.2% Non-room revenues 3,65 3,89 4,41 4,298 3,866 4,179 4,528 3,752 3,96 4,76 YoY growth (%) 13.6% 4.4% 6.1% 6.4% 5.9% 8.1% 8.4% 2.8% 4.1% 4.4% AHPL group Hotel segment revenues 7,463 8,499 8,21 8,745 8,716 8,825 9,588 8,31 8,13 8,384 YoY growth (%) 2.8% 13.9% -3.5% 6.6% 16.8% 1.3% 8.6% 11.3% -3.6% 4.6% Property development segment revenues (incl. eliminations) YoY growth (%) -84.% -17.3% 6.% 6.% -17.3% 6.% 6.% -17.3% 6.% 6.% AHPL revenues 7,891 8,853 8,576 9,124 9,7 9,2 9,986 8,664 8,388 8,781 YoY growth (%) -1.9% 12.2% -3.1% 6.6% 14.9% 1.4% 8.5% 9.8% -3.2% 4.7% Source: AHPL, TRAN, Amba estimates 13

14 P/E analysis yields a fair value range of LKR57-7 per share AHPL s 12-month forward P/E has ranged from 1.1x to 25.1x since September 21. The share s 24-month historical forward P/E stands at 1.2x. The stock currently trades at 11.1x its 12-month FY14E forward EPS (based on our forecasts) a 8.5% premium to its 24-month historical average. Figure 15: AHPL has traded at a P/E of between 1.1x and 25.1x over the past three years Apr-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Aug-13 1x 14x 18x 21x 25x MPS Source: AHPL, Bloomberg In determining a P/E valuation range, we apply two scenarios: Pessimistic scenario: Here we assume a 1% discount to the current 24-month average, implying that AHPL will trade at a forward multiple of 9.2x. This could be driven mainly by lower tourist arrivals than the government estimates and a decline in the number of guests patronizing city hotels (lower occupancies). This could be further exacerbated by higher room prices in Colombo city hotels, which makes Colombo not as competitive as its regional peers. This scenario also accounts for higher-than-anticipated increases in overhead costs, which could weigh down on margins. Applying this multiple to our FY14E EPS estimate of LKR6.2, we arrive at a fair value of LKR57 per share. Optimistic scenario: Under this scenario, we applied a potential upside to occupancies as a result of closures of competitor hotels and a demand-driven increase in ADRs. We also assume that the government is able to meet its tourist arrival targets. In addition, EBIT margins see further potential upside on account of the lower operating and financial leverage enjoyed by AHPL relative to its peers. We applied a 1% premium to the 24-month historical P/E average and arrived at a forward multiple of 11.2x. Applied to our forecast of FY14E EPS, this leads to a share price level of LKR7 per share. Scenario analysis driven by changes to base-case occupancy, ADR and EBIT margin estimates P/BV analysis supports our P/E valuation with a range of LKR58-71 On a P/BV basis, AHPL currently trades at an FY14E multiple of 1.4x, a 5.8% premium to its 24-month historical average and an 8.8% premium to its peer average. Applying a 1% upside and 1% downside (warranted by the upside and downside risks as discussed on pages 4 and 9) to the 24-month historical average, we arrive at a range of LKR

15 Relative valuation data used as a measure of comparison Figures 16 and 17 present AHPL s valuation metrics relative to its peers. AHPL trades at a 33.8% discount to the average of its peers based on P/E valuation metrics. The share trades at an FY14E P/E of 11.1x, compared to the peer group average of 16.8x. Figure 16: AHPL trades at an FY14E P/E of 11.1x P/E EPS CAGR FCF yield Company name E 215E FY14E-FY15E Asian Hotels and Properties PLC 23.4x 16.1x 12.4x 11.1x 11.6x 2.5% 9.2% 7.1% Domestic peers Aitken Spence Hotel Holdings PLC 32.3x 17.1x 14.1x 1.3x 9.2x 16.2% 4.% 9.8% The Kingsbury PLC 77.x NA NA NA 12.5x NA -15.9% -97.8% Galadari Hotels Lanka PLC NA NA NA NA NA NA 3.7% 17.6% TAJ Lanka Hotels PLC 84.5x 34.x 15.8x NA NA NA 3.4% 8.% John Keells Hotels PLC 33.6x 16.6x 17.1x 12.2x 9.5x 19.5% -4.4% 1.% Kandy Hotels PLC 8.9x 49.3x 37.1x NA NA NA 1.1%.3% Renuka City Hotels PLC 13.6x 3.2x 6.8x NA NA NA 15.8% 3.7% International peers EIH LTD NA 4.x 75.5x 34.9x 27.5x 48.4%.7% -1.% Hotel Leelaventure LTD 77.x NA NA NA NA -19.%* -54.7% -74.6% Taj GVK Resorts PLC 13.4x 16.2x 45.7x 11.9x 9.x 19.6%*.% -4.6% Genting Malaysia Berhad 15.2x 15.2x 14.3x 14.5x 14.x 9.5% 3.6% 6.6% Shangri-La Hotel Bangkok NA NA 5.x NA NA NA 4.8% 11.7% OHTL PCL 72.9x 58.2x 25.x NA NA NA 4.3% 6.1% Mean 5.x 27.7x 3.1x 16.8x 13.6x 23.4% -2.6% -8.7% Median 53.3x 17.1x 21.1x 12.2x 11.x 17.9% 3.4% 3.7% High 84.5x 58.2x 75.5x 34.9x 27.5x 48.4% 15.8% 17.6% Low 13.4x 3.2x 6.8x 1.3x 9.x 9.5% -54.7% -97.8% Source: AHPL, Bloomberg, Amba estimates Note: Genting Malaysia Berhad, Shangri-La Hotel Bangkok and OHTL PCL have their financial year end as at 31 December *Hotel Leelaventure LTD and Taj GVK Resorts PLC have been excluded from the EPS mean, median, high and low calculations as they are outliers No potential peer has an identical set of business segments. The companies listed in Figures 16 and 17 are largely city hotels, but do include a few with resort operations as well (e.g., Aitken Spence Hotel Holdings PLC, John Keells Hotels PLC, EIH Ltd, Genting Malaysia Berhard and Taj GVK resorts PLC). However, while the companies in the peer set are not a perfect match and lack financial data in the forecast period, they provide some measure of comparison with other regional five-star city hoteliers. 15

16 Figure 17: AHPL trades at a P/BV of 1.4x FY14E, an 8.8% premium to its peer average P/BV Company name E 215E Asian Hotels and Properties PLC 3.x 2.3x 1.4x 1.4x 1.3x Domestic peers Aitken Spence Hotel Holdings PLC 3.7x 2.1x 1.9x 1.5x 1.3x The Kingsbury PLC 2.6x 2.2x 2.4x 1.6x 1.4x Galadari Hotels Lanka PLC 4.5x 2.3x NA NA NA TAJ Lanka Hotels PLC 4.2x 2.x 1.5x NA NA John Keells Hotels PLC 2.2x 1.3x 1.2x.9x NA Kandy Hotels PLC.7x.7x.9x NA NA Renuka City Hotels PLC 1.4x.6x.5x NA NA International peers EIH LTD 1.8x 1.9x 1.2x 1.3x 1.2x Hotel Leelaventure LTD.7x.8x.7x.8x 1.2x Taj GVK Resorts PLC 1.8x 1.4x 1.2x 1.x 1.x Genting Malaysia Berhad 1.7x 1.8x 1.5x 1.7x 1.6x Shangri-La Hotel Bangkok.8x.84 1.x NA NA OHTL PCL 6.4x 6.7x 5.9x NA NA Mean 2.5x 1.9x 1.7x 1.3x 1.3x Median 1.8x 1.8x 1.2x 1.3x 1.3x High 6.4x 6.7x 5.9x 1.7x 1.6x Low.7x.6x.5x.8x 1.x Source: AHPL, Bloomberg, Amba estimates Note: Genting Malaysia Berhad, Shangri-La Hotel Bangkok and OHTL PCL have their financial year end as at 31 December 16

17 Share Price Performance AHPL shares closed at LKR69 on 18 September 213, LKR12 lower than 12 months earlier, a decline of 14.6%, compared to a.5% increase in the S&P SL 2, a 2.5% decline in the All Share Price Index (ASPI) and a 2.8% decline in JKH over the period. Figure 18: AHPL has performed modestly in the recent past 9, 3 8, 7, 25 6, 5, 2 4, 3, 15 2, 1 1, 5 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 ASPI (LHS) S&P SL2 (LHS) AHPL (RHS) JKH(RHS) Source: CSE, Bloomberg As shown in Figure 19, over the past three years, AHPL has declined more than its parent JKH, and the two main indices on the CSE. However, its more recent performance (over the past 6 months) indicates a turnaround. Figure 19: AHPL vs. key indices 3m 6m 1 year 2 years 3 years AHPL -6.4% -.4% -14.6% -26.1% -29.5% JKH -2.% -13.% -2.8% -2.3% -2.6% S&P SL 2-9.7% -3.8%.5% -1.3% -12.% ASPI -8.2% -.4% -2.5% -17.% -11.9% Source: CSE, Bloomberg 17

18 Earnings release focus areas Here is a checklist of items that investors should track in the next and subsequent quarterly earnings release. We will closely track the performance of AHPL across these key areas, and will revise our forecasts and update our valuation range in earnings update notes. For the firm as a whole 1. What is parent company JKH s view on AHPL in the long term? Currently, none of JKH s property projects fall under AHPL. 2. Has the group taken any new debt? Hotel segment 1. How do actual tourist arrivals compare with government projections? For 213, the Sri Lankan government is targeting 1.2m tourist arrivals compared with just over 1m in What have been the occupancy rates at five-star city hotels? One source of concern in recent months has been the declining occupancy at higher-end hotels despite rising tourist arrivals. 3. What impact does the closure of competitors have on AHPL s occupancy? 4. What is the impact of CHOGM and related events on AHPL s revenues? 5. What is the trend in minimum average room rates across the industry? 6. Is there any update on the expansion of city hotels in Colombo? Property development segment 1. Are there any announcements of new projects under AHPL or of any of JKH s existing projects being brought under AHPL? 18

19 Appendix 1: AHPL in the five-star city hotel industry AHPL holds a dominant position in the five-star city hotel industry, sustainable in the short term According to its FY13 annual report, AHPL holds 5% of the five-star city hotel market by occupancy and 48% by overall revenues. Its flagship property, Cinnamon Grand Colombo (CGC), accounts for 3% of overall industry revenues, while the second property, Cinnamon Lakeside Colombo (CLC), accounts for 18%. Both hotels collectively account for approximately 37% of five-star city hotel room inventory in Colombo, clearly highlighting AHPL s dominance in the local market. In addition, the company s hotels remain the venue of choice for banquets and events, with F&B revenues growing at a 19.7% CAGR over FY1-FY13, compared with a domestic peer average of 15.3%. Figure 2: AHPL s occupancy levels on a positive trajectory, in line with tourist arrivals Occupancy 75% 7% 65% 6% 55% 5% 45% 4% FY8 FY9 FY1 FY11 FY12 FY13 Tourist arrivals 1,2, 1,, 8, 6, 4, 2, Cinnamon Grand Cinnamon Lakeside Tourist arrivals (RHS) Source: AHPL, TRAN, Sri Lanka Tourism Development Authority Note: Tourist arrival data is for the year ended 31 December Cinnamon Grand Colombo (CGC) We believe CGC is the most popular hotel in Colombo, which is evident from its occupancy rate it maintained 72% occupancy throughout FY13 (56% in FY9, just before the civil war ended), driven primarily by the corporate segment and supported by leisure and meetings, incentives, conferences and events (MICE). This also means that CGC is relatively insulated from seasonality, because it is not dependent solely on leisure tourists and has significant business coming in from other types of guests. CGC also has the highest number of restaurant, bar and banquet venues among its peers 13 restaurants offering a wide variety under one roof. CGC s occupancy has historically risen above average in the third quarter due to an increase in the number of leisure guests. It posted LKR4.6bn in revenue for FY13, up 21.5% YoY. Revenues for all the hotels in this sector increased significantly, due primarily to the rise in socio-economic activity in the capital, which CGC was able to capitalize on. Revenue from the 51 rooms increased 28.% YoY in FY13, supported by a 22bps improvement in the occupancy rate, a 7.9% YoY increase in the average daily rate (ADR) in FY13 to approximately USD143 and the 15.% depreciation of LKR against the USD. Revenue per available room stood at LKR13,454. Food and beverage revenue increased 17% and 14% YoY in FY13, respectively. Food, beverage and banquet revenue stood at LKR1,924m, serving 968, heads in total in FY13, which was the highest number served by a city hotel in the industry, as stated in the AHPL FY13 annual report. CGC has 32% of room occupancy in the Colombo city-hotel segment at present. The hotel is well positioned to take advantage of the forthcoming Commonwealth Heads of Government Meeting (CHOGM) to be held in Colombo in November 213 and related events, such as fellowships and other meetings. 19

20 Cinnamon Lakeside Colombo (CLC) CLC was brought under the Cinnamon brand in FY9. It holds 18% of occupancy market share through its 346 five-star rooms out of approximately 2,3 rooms in the Colombo city hotel industry. The hotel maintained a 6% occupancy rate throughout FY13 (46% in FY9), up from 55% in FY12. Total revenue came in at LKR2.8bn in FY13, up 19.6% YoY, while room revenue grew 29.6% YoY. CLC s ADR increased to USD136, while the LKR weakened 15.% against the USD, which helped drive revenues. Revenue per available room increased to LKR1,536 in FY13 from LKR8,261 in FY12 (up 27.5% YoY). CLC s primary revenue driver is the leisure segment of travelers, followed by the corporate and MICE segments. F&B and banquet revenues came in at LKR1.2bn in FY13, serving 598,5 heads. CLC is also likely to benefit from higher occupancies and ADRs due to the CHOGM in November 213. In the current state of the market, AHPL is on course to continue its strong position, especially since the Sri Lanka Tourism Development Authority (SLTDA) has identified a potential short supply in five-star hotel rooms, as it targets 2.5m tourist arrivals in 216. Figure 21: Sri Lanka is facing a shortage of hotel rooms, which helps AHPL maintain occupancy and prices Guests per room (LHS) Number of rooms (RHS) 15,5 15, 14,5 14, 13,5 13, Source: AHPL, Sri Lanka Tourism Development Authority Global hotel brands are expected to add over 2, five-star rooms to current inventory in Colombo Due to increasing economic activity in the capital, the Sri Lankan government expects that there will be a requirement for at least 2, more five-star city hotel rooms by 216 (in addition to the current inventory of approximately 2,3 five-star rooms) to cater to an expanding foreign visitor base. SLTDA estimates a total of 2.5m visitors to Sri Lanka by 216, 1.5m higher than that in 212. Global hotel brands have invested in Sri Lanka to capitalize on the short supply of hotel rooms. 2

21 Figure 22: Upcoming star-class city hotels in Colombo to add at least 1,6 more rooms by 216 Name of hotel Estimated commencement of operations No. of rooms Sancity Business Hotel OZO business hotel Sheraton Colombo* 213/ Hyatt Regency Colombo 214/ Movenpick Colombo* 214/ Shangri-La Hotel Colombo 216/217 5 ITC Hotel Colombo Marino Sands Hotel N/A 27 Eon Resorts N/A 3 Crown Complex N/A ~7 Queensbury N/A 5 Waterfront Properties project (JKH) N/A ~8 Source: Hyatt, The Sunday Times (Sri Lanka), Shangri-La, DailyFT (Sri Lanka), Daily News (Sri Lanka) *Note: We estimate that these hotels will exceed their stated completion dates All hotels, excluding Marino Sands, are backed by international hotel brands and their managements have vast experience in operating five-star city hotels globally. AHPL will face intense competition from FY16E onwards from these brands, which have similar or wider global market reach through the large portfolio of hotels. We believe foreign travelers, given an opportunity, could pick international brands over local brands due to confidence in a well-known specialist hotelier, familiarity and positive reviews on travel websites. With Indians forming the largest portion of tourists in Sri Lanka, as shown in Figure 23, ITC and Sheraton will look to target Indian travelers through domestic marketing channels. Indians can obtain a visa on arrival in Colombo, which adds to the appeal of visiting Sri Lanka. The Sri Lankan government has also simplified the visa process for European nations and the Americas, where tourists can apply for entry clearance online prior to arriving in Sri Lanka. Figure 23: Top six nationalities visiting Sri Lanka 18, 16, 14, 12, 1, 8, 6, 4, 2, India Western Europe (Other) UK Eastern Europe Germany North America Source: Sri Lanka Tourism Development Authority We believe city hotels are not as exposed to seasonality and fluctuation in tourist arrivals as resorts are due to the more diverse type of guests visiting the capital. With the corporate segment being a significant driver for room revenues, the new hotels have the brand power to attract tourists into their hotels over the local alternatives. However, if the expanded capacity of 4, five-star rooms fall short of demand, as we expect, AHPL would still be able to maintain a strong position in the market and grow revenues albeit at a slower pace. We expect AHPL to face price competition from the new global hotel brands set to enter the market, as most of these brands have significant financial backing and have the capacity to reduce rates in order to capture market share, should the need arise. 21

22 Focusing on industry positioning, an overview of rates in similar hotels across major regional cities highlights that Sri Lankan rates tend to be more expensive although Colombo trails regional capitals in terms of infrastructure, presence of global firms and leisure activities. Officials from the Sri Lanka Association of Inbound Tour Operators cite the government imposed minimum rate rule as the reason why the rates are higher relative to regional peers. However at present, increasing economic activity creates the demand for five-star city hotel rooms, despite high prices. The government recently met with industry officials to discuss the impact of the minimum rate rule, but there is no clear indication whether any changes would be made. Figure 24: Colombo five-star ADR is higher than the average regional rate of USD135 USD Ho Chi Minh City Bangkok Kuala Lumpur Jakarta Mumbai Colombo Singapore ADR per city Regional ADR Source: Sri Lanka Tourism Development Authority, Asia Web Direct Competitors in the five-star hotel segment have started to respond to increased competition forecasts AHPL s competitors at present are Hilton Colombo (Hilton), Galadari, Taj Samudra, The Kingsbury and Galle Face Hotel. In revenue terms, Hilton lies second in the industry followed by Taj Samudra, Galadari and The Galle Face Hotel (as per available information). The Kingsbury was re-launched in December 212 following an extensive refurbishment and re-branding exercise and the hotel s competitiveness is yet to be quantified. Taj Samudra and Galle Face Hotel have refurbishing projects underway at present, following which the hotels are expected to aggressively target the increasing number of tourist arrivals and consolidate their positions in the market, prior to the arrival of new competition. 22

23 Figure 25: Peer revenue comparison highlights AHPL s position in the industry LKRm 5, 4,5 4, 3,5 3, 2,5 2, 1,5 1, Cinnamon Grand Cinnamon Lakeside Galadari HD PLC (Hilton Colombo) HSC PLC (Kingsbury) Taj Lanka CHC(Galle Face Hotel) Source: AHPL, Galadari, Hotel Developers PLC (HD PLC), Hotel Services Ceylon PLC (HSC PLC), Taj Lanka Hotels PLC, Ceylon Hotels Corporation (CHC) A quick analysis on the financial performance of AHPL s peers shows that only Taj Samudra is operating profitably at present, only turning around its business in FY12. AHPL, however, has operated profitably in both hotels for over five years. Figure 26: AHPL has shown strong profitability consistently LKRm 2, 1,5 1, Cinnamon Grand Cinnamon Lakeside Galadari HD PLC (Hilton Colombo) HSC PLC (Kingsbury) Taj Lanka CHC(Galle Face Hotel) Source: AHPL, Galadari, Hotel Developers PLC (HD PLC), Hotel Services Ceylon PLC (HSC PLC), Taj Lanka Hotels PLC, Ceylon Hotels Corporation (CHC) The Hilton, CGC s main competitor, will be closed to undergo major refurbishment in December 213. This is an opportunity for CGC in the short term, where it can increase occupancy levels by capturing bookings that would otherwise have been taken up by The Hilton. Similarly CLC can capture any bookings that cannot be taken by Galle Face Hotel. We believe that despite five-star net room additions in Colombo (with the additions coming from international competitors like Hyatt and Sheraton, as highlighted in Figure 27), AHPL should be able to sustain its market dominance through FY14E, due to the aforementioned closures. 23

24 Figure 27: AHPL to sustain occupancies and ADRs despite five-star net room additions through 214 New room inventory Hyatt 475 Sheraton 36 Rooms unavailable (closed for refurbishment) 781 Galle Face Hotel 81 Hilton Net additions 316 Source: Hyatt, The Sunday Times (Sri Lanka), DailyFT (Sri Lanka) 24

25 Appendix 2: Company overview Asian Hotels and Properties PLC (AHPL) is among the top 2 publicly traded firms on the Colombo Stock Exchange (CSE) by market capitalization and is the market leader in the five-star city hotel segment in Colombo, with a market share of 51% (occupancy) and revenue share of 48% as of 31 March 213. AHPL comprises two five-star city hotels under the Cinnamon brand and a property development division. Established in 1993 under John Keells Holdings PLC (JKH), Sri Lanka s largest conglomerate, AHPL was listed on the CSE in 24. AHPL is 78.6% owned by JKH and has a market capitalization of LKR3bn (USD23m) as at 18 September 213. AHPL s market share and its ability to charge higher-than-average prices help to earn the highest revenues amongst its peers in the five-star city hotel segment. Following the completion of all property development projects in FY13, AHPL generates 59% of revenues from Cinnamon Grand, 36% from Cinnamon Lakeside and 5% from property development. Figure 28: Hotel segment dominates the revenue generation at AHPL, contributing 7% on average to group revenue LKRm 1, 8, 6, 4, 2, - Source: AHPL, TRAN FY9 FY1 FY11 FY12 FY13 Cinnamon Grand Cinnamon Lakeside Property development Figure 29: Cinnamon Grand continues to be the largest EBIT contributor, generating approximately 51% of group EBIT LKRm 3, 2,5 2, 1,5 1, 5 - Source: AHPL, TRAN FY9 FY1 FY11 FY12 FY13 Cinnamon Grand Cinnamon Lakeside Property development AHPL recorded LKR7.9bn in revenue for FY13 (year end 31 March 213), with a CAGR of 7.4% over FY9-FY13. The group generated EBIT of LKR2.5bn in FY13, representing a 15.% CAGR over FY9-FY13. Total revenue declined in FY13 compared with FY12 due to the completion of revenue recognition from all property development projects, which is explained by the contraction of the property development section in Figure 28. Going forward, we believe the property development segment s revenue contribution will be limited to rental income. 25

26 Figure 3: AHPL revenue grew at a 7.5% CAGR over FY9- FY13 Figure 31: AHPL EBIT grew at a 15.% CAGR over FY9-FY13 LKRm 1, 8, 6, 4, 2, FY9 FY1 FY11 FY12 FY13 6% 5% 4% 3% 2% 1% % -1% -2% -3% LKRm 3, 2,5 2, 1,5 1, 5 - FY9 FY1 FY11 FY12 FY13 2% 15% 1% 5% % -5% -1% Revenues (LHS) YoY growth (RHS) EBIT (LHS) YoY growth (RHS) Source: AHPL Source: AHPL AHPL s business segments AHPL s city hotels segment (95% of FY13 group revenues) includes two hotels: the flagship Cinnamon Grand Colombo and Cinnamon Lakeside Colombo, which together control 51% of market share in terms of occupancy in the segment in Colombo. Currently, these two hotels account for over 3% of five-star room inventory in Colombo and have been renovated to face intensifying competition from upcoming city hotels as well as existing hotels under refurbishment. Cinnamon Grand Colombo (CGC) CGC (59% of FY13 revenues) continues to hold its position as the leading hotel in the city and commands 32% market share in terms of overall occupancy in the city hotels segment and 34% of revenue share amongst city hotels in Colombo, based on the AHPL FY13 annual report. It is the preferred hotel in Colombo as voted for by many travel websites and is also the leading hotel to host high-profile local and international events in Colombo. CGC s primary business driver is the corporate segment, followed by the leisure and meetings, incentives, conferences and events (MICE) segments. CGC s 51 rooms are able to command a premium compared to its peers due to the hotel s popularity and prime location. CGC has 13 dining and bar venues and 8 banquet/conference halls, which makes it the leading hotel to host events. It sells the highest number of F&B covers (number of meals served) among city hotels. Cinnamon Lakeside Colombo (CLC) CLC (36% of FY13 revenues) holds a market share of 18% (occupancy) in the city hotels segment and 18% of revenue share amongst city hotels in Colombo, as stated in the Cinnamon Lakeside (CSE ticker: TRAN) FY13 annual report. Following its inclusion under the Cinnamon brand in FY9, CLC has consistently gained popularity amongst local and international travelers seeking variety in dining and entertainment. CLC s primary business driver is the leisure segment, followed by the MICE and business segments. CLC is able to charge higher room rates than previously for its 346 rooms following the refurbishment in 212, which increased the number of premium rooms by 2%. CLC has nine dining and bar venues and nine banquet/event halls, which further contribute to AHPL s leading position in the city hotels market. 26

27 Figure 32: CGC s revenue composition in FY13 F&B contributes nearly half of all revenues Figure 33: CLC s revenue composition in FY13 includes a slightly lower proportion from room revenue compared with CGC Beverage 6% Others 5% Rooms 53% Beverage 6% Others 1% Rooms 48% Food 36% Food 36% Source: AHPL Source: TRAN The property development segment is a small contributor to total AHPL revenue (5% in FY13) following the completion of all development projects. Crescat Residencies (completed over 12 years ago), Monarch (completed in FY11) and Emperor (completed in FY12) were developed as residential complexes and have all been sold. This segment currently owns one rental property: Crescat Boulevard, which is an up-market shopping mall, located in the same location as CGC and the fully developed apartment complexes in the heart of Colombo. Crescat Boulevard and Shopping Mall (CBSM) This property will be the property development segment s only source of revenue in the short term as there are no other apartment projects in the pipeline. Revenues are earned through store space rentals and special events and promotions. CBSM s location and its close proximity to other star class hotels and property development projects give it an advantage. CBSM offers leading global brands that cater to both local and international visitors and it also houses a food court and upmarket restaurants. CBSM experienced a 6% YoY increase in the number of visitors in FY13. Management strategy, transparency and governance AHPL currently controls 5.4% of city hotel market share and has been successfully maintaining its leadership in the segment over the past four years. AHPL s hotels have strong earnings potential owing to increasing tourist arrivals and business travelers. Strong demand for its banquet services and increasing popularity of its dining and bar venues should grow, along with increased spending by locals, fuelled by strong economic growth in Sri Lanka. While AHPL s disclosure may be sound by local standards, it still lags those of international peers. This poses a number of challenges to the valuation process, including the following: The company s disclosure at a segment level is insufficient to arrive at accurate calculations and forecasts. Items such as breakdown of revenue items and the breakdown on the type of guests are not disclosed. The management discussion and analysis section of the annual report does not list AHPL s specific targets, and investors and analysts have to make assumptions regarding the company s future direction. Many details on segment performance, such as hotel occupancy rates, property development segment details, and food and beverage breakdowns, are disclosed only annually. We believe providing these additional details on a quarterly basis would be of greater value to current and potential investors. 27

28 Shareholding structure Domestic investors hold 94%, and institutional investors (both domestic and international) hold 97% of AHPL s shares overall. JKH is the largest shareholder with a 78.6% stake in AHPL, and management controls a negligible stake. Figure 34: AHPL is 94% domestic owned; JKH is the largest shareholder with 78.6% Figure 35: JKH is the largest institutional investor and institutions own 97% of AHPL International investors 6% Retail investors 3% Other domestic investors 15% John Keells Holdings PLC 79% Other institutional investors 18% John Keells Holdings PLC 79% Source: AHPL, as of March 213 Note: Management holds.1% of shares Source: AHPL, as of March 213 Note: Management holds.1% of shares The top five shareholders as of March 213 are presented below. Name of shareholder Description Stake John Keells Holdings PLC Parent company 78.6% Employees Provident Fund A state-controlled pension fund in Sri Lanka 5.7% Sri Lanka Insurance Corporation Life Fund Life fund of the state owned insurance company 2.3% Bank of Ceylon On account of Ceybank Unit Trust 2.1% Fi-Ciblux Batterymarch Global Emerging Market Fund 3.8% Source: AHPL Board of directors As of March 213, AHPL s board comprised eight directors. Their details are provided below. Name of Director Description Mr. Susantha Ratnayake Chairman of AHPL and chairman and CEO of JKH. Has held dual positions since 26. A 35-year veteran with JKH. Mr. Ajit Gunewardene Managing director of AHPL and deputy chairman of JKH. Member of the board for 2 years, and has been with JKH for more than 3 years. Director of a number of companies within the JKH group. Mr. Ronnie Pieris Director of AHPL and was appointed to the board in 23. He is also the group finance director of JKH and has been on the JKH board since 22. Mr. Rohan Karunarajah Appointed as director in 25. General manager of Cinnamon Grand and senior vice president of JKH. Mr. Suresh Rajendra Appointed as director in 26, he also serves as the president, property group of JKH and is a director of other companies within JKH. Mr. Sanjiva Senanayake Non-executive independent director since 29. Ms. Shirani Jayasekara Non-executive independent director appointed in 29. She also serves as audit advisor to Carsons Cumberbatch PLC. Mr. Cholmondeley Pinto Non-executive independent director and chairman of the Board Audit Committee of AHPL. Source: AHPL 28

29 Figure 36: AHPL Corporate Holding Structure Cinnamon Grand Hotels Cinnamon Lakeside Asian Hotels and Properties PLC Crescat Boulevard and Shopping Mall Property development The Emperor (apartments - fully completed) Monarch (apartments - fully completed) Source: AHPL, TRAN 29

30 Appendix 3: Key financial data Summary group financials (LKRm) INCOME STATEMENT E 215E 216E (For the year ended 31 March) Revenues 7,457 8,855 7,891 8,853 8,576 9,142 Gross profit 3,648 4,378 4,823 5,367 5,24 5,586 EBITDA 2,94 2,619 2,925 3,371 3,152 3,382 EBIT 1,731 2,225 2,496 2,963 2,783 3,11 EBT 2,184 2,655 3,336 3,765 3,542 3,738 Net profit 1,775 2,149 2,494 2,742 2,622 2,691 BALANCE SHEET E 215E 216E (As at 31 March) Current assets Cash and cash equivalents Short term investments 318 2,779 2,716 2,24 2,24 2,24 Accounts receivable Inventories 1, Total current assets 2,663 4,38 3,941 3,768 3,799 3,883 Non-current assets Property, plant and equipment 11,848 12,5 18,39 18,43 18,549 18,726 Intangible assets Total non-current assets 15,488 16,11 22,79 24,449 25,395 26,572 Total assets 18,151 2,5 26,731 28,217 29,194 3,456 Current liabilities Short term debt Bank Overdraft Accounts payable Income tax payable Total current liabilities 1,221 1,64 1,83 1,583 1,489 1,541 Non-current liabilities Long term debt Postretirement benefit obligation Total non-current liabilities Total liabilities 1,649 2,18 1,68 2,114 2,2 2,72 Equity Common share capital 3,345 3,345 3,345 3,345 3,345 3,345 Retained profit 5,194 6,491 7,242 7,922 8,677 9,485 Minority interest 2,783 2,963 3,426 3,728 4,44 4,447 Total equity 16,52 17,942 25,123 26,12 27,174 28,384 Total liabilities and equity 18,151 2,5 26,731 28,217 29,194 3,456 3

31 Cash Flow Statement E 215E 216E (For the year ended 31 March) Operating activities Net cash flow from operating activities 3,13 4,323 2,685 3,534 3,184 3,5 Investing activities Purchase of PPE and intangible assets (2,9) (1,157) (495) (499) (515) (549) Interest received Net cash flow from investing activities (2,851) (1,13) (145) (1,76) (949) (1,235) Financing activities Common share issuance/(repurchase) Interest paid (44) (13) () (5) (7) (7) Dividends paid to common shareholders (221) (443) (2,214) (2,65) (1,866) (1,884) Dividends paid to minority interests (57) (17) (34) (334) (25) (27) Net cash flow from financing activities (934) (627) (2,555) (2,44) (2,123) (2,161) Net increase/(decrease) in cash and cash equivalents (655) 2,566 (15) (63) Key ratios E 215E 216E Growth Revenue growth (%) (1.9) 12.2 (3.1) 6.6 EBITDA growth (%) (6.5) 7.3 EBIT growth (%) (6.1) 8.2 EBT growth (%) (5.9) 5.5 Net profit growth (%) (5.6) 5.5 Recurrent diluted EPS growth (%) (4.4) 2.7 Margins EBIT margin (%) EBT margin (%) Net profit margin (%) ROE (%) ROCE (%) Liquidity and efficiency Current ratio (x) Total asset turnover (x) Gearing and cash flow Debt/Capital (%) FCF yield )%) Valuation P/E (x) P/BV (x) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x)

32 Per share data E 215E 216E Recurrent diluted EPS (LKR) Common DPS (LKR) BVPS (LKR) Net operating cash flow per share Net cash flow per share (1.5) 5.8 (.) (1.4).3.2 Source: AHPL, Amba estimates Segmental summary (For the year ended 31 March) CGC E 215E 216E Revenues 3,17 3,84 4,623 5,262 5,134 5,492 EBIT 724 1,66 1,445 1,8 1,714 1,867 Occupancy 73.% 7.2% 72.4% 76.4% 74.5% 76.5% ADR (LKR) 11,79 14,972 18,584 21,27 19,82 2,721 RevPAR (') 8,88 1,51 13,454 16,242 14,765 15,851 YoY growth Revenues 34.3% 26.1% 21.5% 13.8% -2.4% 7.% EBIT 9.7% 47.3% 35.5% 24.6% -4.8% 9.% Occupancy 14.1% -3.8% 3.1% 5.5% -2.4% 2.7% ADR (LKR) 36.8% 35.1% 24.1% 14.5% -6.8% 4.5% RevPAR 56.% 3.% 28.% 2.7% -9.1% 7.4% Margins EBIT 24.% 28.% 31.3% 34.2% 33.4% 34.% CLC E 215E 216E Revenues 1,972 2,375 2,84 3,237 3,67 3,252 EBIT , ,24 Occupancy 62.% 55.% 6.% 67.1% 62.% 63.5% ADR (LKR) 1,219 15,2 17,56 2,34 18,642 19,3 RevPAR (') 6,336 8,261 1,536 13,618 11,558 12,256 YoY growth Revenues 84.9% 2.5% 19.6% 14.% -5.2% 6.% EBIT 228.8% 37.7% 36.6% 21.8% -8.5% 7.1% Occupancy 51.2% -11.3% 9.1% 11.8% -7.6% 2.4% ADR (LKR) 34.6% 47.% 16.9% 15.6% -8.2% 3.5% RevPAR 13.5% 3.4% 27.5% 29.3% -15.1% 6.% Margins EBIT 23.1% 26.4% 3.2% 32.3% 31.2% 31.5% Source: AHPL, TRAN, Amba estimates FX rates (LKR/USD): Y/E 31 March 213 = Y/E 31 March 212 = Y/E 31 March 211 =

33 Appendix 4: SWOT analysis Strengths Strong brand recognition Experienced management team and backed by JKH Perceived as the leading five-star city hotel company in Sri Lanka Strong net cash position Low debt/equity ratio Marketing benefits from JKH s leisure segment Weaknesses No expansion plans as JKH focuses on other hotels and property development projects Opportunities Strong anticipated growth in tourist visits Rising GDP/capita and disposable income Closure of competitor hotels, which could add to occupancy CHOGM and related events can add significantly to revenues Threats Higher rates may deter guests as they look for cheaper rates in other hotels. Legislation (focused on minimum room rates and tourism industry wages, for example) could negatively impact the growth of the leisure segment Entry of global hoteliers from FY15 onwards 33

34 E 214E E 214E 215E E 214E 215E 216E E Asian Hotels and Properties PLC Fact Sheet Sri Lanka investment environment overview Sri Lanka s economy has been on an upward trajectory since the end of the three-decade civil war in May 29. Sri Lanka currently boasts South Asia s highest GDP growth, conducive fiscal and monetary policy, and favorable socio-economic conditions, which together create an attractive investment destination. Figure 37: Sri Lanka's GDP projected to increase at a 7% CAGR E Figure 38: GDP per capita to increase 33% by 216E % USD 5, 4, 3, 2, 1, Source: Central Bank of Sri Lanka, Department of Census and Statistics Figure 39: Annual core inflation post-war has averaged 6.7%, government targeting mid-single digit levels in the medium term % Source: Department of Census and Statistics, Central Bank of Sri Lanka Figure 41: Fiscal deficit target of 5.2% of GDP for 214E Source: Central Bank of Economic and Social Statistics of Sri Lanka 212, Road Map Central Bank of Sri Lanka Figure 4: CBSL expects the rupee to stabilize in the medium term despite recent volatility Jan-7 Apr-8 Aug-9 Dec-1 Apr-12 Jul-13 Source: Bloomberg LKR/USD LKR/EUR LKR/GBP Figure 42: Debt-to-GDP to fall to 71% by 215E LKRbn % 8% 4% % % Fiscal Deficit LKR bn As a % of GDP Source: Central Bank of Sri Lanka Source: Central Bank of Sri Lanka 34

35 Banks, Finance & Insurance Beverage, Food & Tobacco Chemicals & Pharmaceuticals Construction & Engineering Diversified Hotels & travels Investment Trusts Land & Property Manufacturing Plantations Power & Energy Services Telecommunication Trading Banks, Finance & Insurance Beverage, Food & Tobacco Chemicals & Pharmaceuticals Construction & Engineering Diversified Hotels & travels Investment Trusts Land & Property Manufacturing Plantations Power & Energy Services Telecommunication Trading Asian Hotels and Properties PLC The Sri Lankan equity market offers a rare and attractive alternative to investors in an investment era impacted by economic growth worries. Backed by the country s robust economic growth, the Sri Lankan capital market is well set to offer attractive returns to investors who are keen to be a part of this emerging market success story. There are several strong incentives for entering the Sri Lankan capital market. Figure 43: Post war, the ASPI has significantly outperformed global and developed market indices Jul-9 Apr-1 Feb-11 Dec-11 Oct-12 Aug-13 ASPI Dow Jones FTSE 1 MSCI World Source: Bloomberg *Note: All figures re-based to 1 July 29 DAX Figure 45: The CSE s market capitalization has doubled since 29 Figure 44: Post war, the ASPI has also outperformed some of the best-performing regional indices Jul-9 Mar-1 Nov-1 Jul-11 Mar-12 Dec-12 Aug-13 ASPI Bombay (BSE 5) Jakarta (JCI) Philippines (PASHR) Thailand (SET) Hanoi (VNINDEX) MSCI Emerging Market Index Source: Bloomberg *Note: All figures re-based to 1 July 29 Figure 46: The government anticipates FDI inflows to reach USD2bn in 213, a 19% CAGR E LKRbn 3, 2,5 2, 1,5 1, 5 1,92 2,211 2,214 2,168 2, (August) USDm 2,5 2, 2, 1,5 1,66 1,338 1, E Source: Bloomberg, Central Bank of Sri Lanka Figure 47: Most sector P/Es are below market average and historical valuations Source: Ministry of Finance and Planning, Board of Investment of Sri Lanka Figure 48: Trend is similar on a P/BV value Average market P/E Average market P/BV Source: Colombo Stock Exchange Source: Colombo Stock Exchange 35