Asia’s New Tiger - Investment Outlook - September 2004
In the aftermath of SARS and wars, Shangri-La Hotels and Resorts saw an opportunity to drive forward with plans to double its portfolio, launch a branded spa and ride the upturn to better IRR.
By Staff -- HOTELS Magazine, 9/1/2004
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“Shangri-La Hotels and Resorts is coming out of the gate as a different company,” says Robert Hecker, managing director, Horwath Asia Pacific, Singapore. New goals include doubling the 44-hotel chain by 2008; rolling out the new Chi spa concept in 11 hotels; renovating 10 major hotels; and, quite naturally, boosting shareholder returns. Among Shangri-La’s development targets is expansion in mainland China and throughout the region, particularly Australia, India and South Asia, as well as penetration into the Middle East and the gateways of Europe and North America. And, there is a new strategy: A necessary shift away from the Asian ownership model to a vision that balances direct investment and management contracts. “A lot of people never thought Shangri-La would consider growth through management contracts,” Hecker says. “Based on what they have achieved over the last year (six new management contracts signed in 2003 for a 33-year-old group that previously owned all but five of its hotels), there is a clear change in direction.”
Can Shangri-La Compete?
Although this strategy looks fresh in Asia, Shangri-La now joins a host of luxury brands jockeying for position in the rough-and-tumble fight for management contracts. In Asia, where it is strong both as a brand and a hotel network, there is little question that the core Shangri-La brand and its 4-star sister, Traders, can hold their own.
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Some competitors may charge that Shangri-La has limited experience answering to investors not on its own board, but consultants and analysts see that argument as specious. They point to Shangri-La’s frequent positioning as a market leader, especially in China, and its delivery on the numbers.
That comes from the top. Giovanni Angelini, CEO and managing director of Shangri-La International Hotel Management Ltd. and a director of a number of companies within Shangri-La Asia Ltd., is known as an “operations man” who prefers a head-down work ethic to a strong public profile. For much of his 39-year career, the Italian-born Angelini sat in the general manager’s chair, including a stint at Hong Kong’s Island Shangri-La, and he brings to the executive table what he learned at hotels around the world and as vice president of operations for Shangri-La. “He does his job, and that impresses people. It is playing a role in getting management contracts,” Hecker says.
Behind Angelini is a competitive edge few companies can equal: Hong Kong’s astute Kuok family, its extensive network of business relationships and the broad menu of opportunities afforded by the Kuok’s conglomerate. Founder and still the majority shareholder with a 52% stake, the Kuok Group is synonymous with diversified business-building activities that broaden market bases, expand the economic mix and create jobs.
The Kuoks are relationship-builders par excellence, say Asian sources, and that has paid off both for the group and for its hotel company. “Shangri-La, through the business interests and reputation of the Kuok family, is extremely well connected in Asia,” says Robert Stiles, managing director, Sonnenblick Goldman, San Francisco. “These connections have helped the company in growing its brand across the region. The brand itself is well received in Asia—as an Asian brand. It also has not hurt that most of the group’s expansion has included investment or outright ownership positions by the company.”
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That approach opened up China for Shangri-La and may well be the vehicle that demolishes the barriers to entry in markets such as India, which traditionally have been hard on outsiders. “I can see Shangri-La having an advantage in India,” Hecker says. “Developers know the brand. They may have stayed in Shangri-La hotels. They may also want to tap other opportunities within the Kuok Group.” No surprise, then, that Shangri-La is opening a managed hotel in New Delhi late this year.
David Baffsky, chairman, Accor Asia Pacific, one of the few offshore companies to achieve a strong multibrand presence in China and throughout Asia, also sees Shangri-La building from a solid base. “Like Accor, Shangri-La saw the potential of China at an early stage,” Baffsky says. “We used a multi-faceted marketing strategy that suited our 2- to 5-star brands and built strong partnerships, particularly in relation to sales, marketing and distribution; they expanded largely through investment and concentrated at the top end of the market. Certainly, Shangri-La has made its mark at the top of China’s hotel market. Their growth has been both impressive and well managed. They expanded in areas of traditional strength in Asia before moving into the Middle East and Australia. Other groups tried to expand too quickly and suffered as a result.”
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Experts also predict that the combination of Shangri-La’s brand strength, Asian style and solid financial backing may be saleable in the Middle East and even in Europe. In markets where the Top 10 brands already have saturated the landscape, developers are showing a certain willingness to look for a fresh name, especially one that can market in-demand Asian design and service standards. That, say market watchers, could give Shangri-La an entrée. This is a brand with a clear identity. It may not have the cutting-edge glamour that Mandarin Oriental Hotel Group has exported to Miami and New York City, but it does have a unique brand image and an owner’s understanding of return on investment. What Angelini terms “luxury without pretension”—marble-floored grand lobbies, gardens, crystal chandeliers and fine Asian art—is the packaging for market-driven properties. Typically Shangri-Las are bigger than most luxury hotels with more than 500 rooms. They can lure FITs with luxurious rooms, groups with what typically are the largest ballrooms in their market, and they can bring in locals with a wide variety of restaurants. That concept may have to be downscaled a bit in Europe, but the bottom-line emphasis will remain the same.
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In the U.S. markets, however, Shangri-La will have to work harder to get noticed. Despite its polyglot business environment, the United States has not always been a nurturing destination for overseas hotel brands. Experts such as Stiles see a resort presence, perhaps starting with Hawaii and the U.S. West Coast, as a logical growth path. “It will be easier to expand into resort markets than straight urban environments in the United States (and Europe),” Stiles says. “I believe Hawaii cannot be far off. Without the loyalty programs and critical mass in the United States, growth across urban markets will be difficult unless largely funded with company capital.”
More money also would be required for the sales and marketing engine if Shangri-La plans to go up against the marketing masters at the U.S.’s hotel giants. Angelini is already at work in that arena. Shangri-La recently established a public relations presence in Europe, strengthened its marketing team and opened a new regional sales office. On the heels of this late August interview, Shangri-La also was rolling out what Angelini describes as an “impactful” new international advertising campaign aimed at increasing brand awareness in key markets.
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Some industry watchers also question whether Shangri-La is spreading itself too thin, and whether its highly centralized corporate culture will be feasible for a fast-growing global company. However, Angelini does not see Shangri-La outpacing its support system. An international sales and marketing push should help showcase the brand, but it also will benefit from being where current customers are expected to travel. “Obviously we would like to have a presence in key gateways in North America and Europe because they are important source markets,” Angelini says. “But, as time progresses and mainland China outbound traffic improves (some 200 million Chinese are expected to have passports to travel abroad by 2020), we also intend to be the preferred choice for these individuals (who know the brand) when they travel to Europe and North America.” Since repeat guests account for 35% to 50% of total occupied rooms, Angelini has reason to expect that loyal customers will follow the brand around the world.
All The Options
The trump card that Shangri-La will continue to hold is equity. Growth through management contracts is essential if Shangri-La is to become the global group on a fast track that its board envisions. But, there is always the lure of capital participation if not sponsorship. Shangri-La, like all hotel companies, has been hard hit by a series of calamities, from the 1997-98 Asian financial crisis to 9/11 and SARS. Angelini cites these factors, as well as “continuous capital investment” in new projects and renovations (including US$300 million spent just in the last two years), as catalysts for declines in achieved rate of return. However, these challenges have not seriously eroded Shangri-La Asia’s firepower. Share buybacks on weakness, refinancing that reduced debt burden and a US$375 million equity placement in conjunction with convertible bonds salved EPS and “augmented the group’s investible resources.”
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Much of the new funding infusion already has been earmarked “for our ongoing investment program in mainland China,” Angelini says. “China will continue to be the land of opportunity,” he says. “Forty-six percent of our business in China comes from domestic travel. The customers’ aspirations for quality, luxury accommodations and service standards and their willingness to pay the price for it leads us to believe there is still room for growth in the luxury hotel segment.” Australia, where Shangri-La recently added a reflagged property in Cairns as a sister property to its Sydney hotel, and India also should benefit.
While Shangri-La has expanded its horizons to include pure management plays, it is not yet departing from an ownership model that has been to good to its shareholders, SARS notwithstanding. “Most operators are reluctant to invest money in a project. We are not. That sets us apart from the companies with which we compete,” Angelini says. “Availability of funds has never been a constraint given our financial strength.”
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Although Shangri-La will continue to prospect for management contracts, Angelini says the ownership-operations decision will be made property by property. For management contracts, that means establishing the property is compatible and will make a positive contribution to the group—both in terms of image and revenues. For the property decision, it comes down to price tag and return. The view from Angelini’s office is that funds available for development, including shareholder funds and bank lines, “are adequate for our growth plans.”
Easy access to capital does not mean complacency, however. “True, we have easy access to the capital and debt markets. But that does not mean we are not closely watching our gearing ratios and interest burden. When it comes to raising additional capital, we have to be mindful of the impact it will have on EPS,” Angelini says.
The obvious question is whether this growth is grooming Shangri-La Hotels and Resorts for an IPO. For now, it sits comfortably under the wing of Shangri-La Asia as its management arm. There is little float in the stock and shareholders are looking at the long term. Nor is there any immediate pressure to separate bricks and brains, as there has been in Europe and the United States. “Asian investors still see strength from the return on ownership,” Hecker says. “I do not think we will see a trend toward separation of property and management at the moment.”
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Shangri-La’s current direction would have to change substantively before any spin-off is under discussion. “Everyone knows that a publicly listed hotel company that has no assets on its books commands better P/E multiples,” Angelini says. “But, for a company that has a real estate portfolio together with a management company, the revenue streams from management contracts would have to be in large enough proportion (to the real estate return) to justify a separate listing. We do not believe Shangri-La has reached that stage as yet.”
Upping The Offer
For now, the main business for Angelini and Shangri-La’s senior management is unit growth. Shangri-La will be the primary growth driver, but Traders expands the offer. Admittedly, this 4-star brand is more opportunistic. Theoretically, Angelini says, there is no ceiling to the average rate for a good 5-star. In that context, Shangri-La should be the better performer. “But, there are no hard and fast rules,” Angelini says. “If a market is characterized by lower achieved rates and has a profile of price-sensitive guests, the Shangri-La brand would be inappropriate. Traders can deliver very good returns, provided the investment is contained at a sensible level, commensurate with the revenue potential for the product.”
“Sensible” is a word often applied to Shangri-La. This is not the type of company to take a side trip into lifestyle concepts or gaming, however attractive these concepts may be. But Angelini bristles at the idea that the company is either conservative or traditional. “We are not, and neither are our guests. They appreciate the kind of innovations that meet their needs,” he says. Watch for more introspective developments such as the launch of the new Chi spa brand, which will debut at 11 key urban hotels and resorts by 2007, and operational improvements, from training and food safety management to environmental initiatives and safety programs.
Investment in these areas should be accretive in the short term. Like consultants, Angelini believes the worst is over. He expects to deliver better returns as travel volumes and corporate/social spending increase in Asia and around the world. “We believe we are poised to benefit from the rebound expected in this region,” he says.
What Works, What Needs Attention
Consultants and analysts give Shangri-La Hotels and Resorts good marks for its operational skills and development potential. But there is work to be done.
BRAND BUILDING
What works: Experts say Shangri-La has “a good name, a good image and good resonance.” A page-long list of awards reflects Asian business travelers’ support for a brand that delivers consistently high service standards and effective regional distribution.
What needs attention: Sales and marketing outside its home market. Most believe Shangri-La can hold its own in the Middle East and maybe Europe, but it will have to go to the next level to take on the sales/marketing juggernauts of the U.S. brands on their own turf. More investment in marketing, advertising and technology may be necessary outside Asia Pacific.
MANAGEMENT GROWTH
What works: Shangri-La has little left to prove as an operator. “Shangri-La has a good reputation as a management company,” says Horwath Asia Pacific’s Robert Hecker. “Outside of Asia, they may get a first chance advantage with developers looking for something different. Asian style and service are more in demand. That should give Shangri-La an edge.”
What needs attention: Shangri-La needs to make sure its senior executives are not spread too thin. Decentralization may have to be on the agenda two to three years out.
GLOBALIZATION
What works: Expansion of the Kuok’s business interests should ensure Shangri-La’s continued dominance in China. Although India has been tough for outsiders, Shangri-La may prove the exception. It is a familiar brand to India’s well-traveled developers, and it has the investment scope of the Kuok family to draw on.
What needs attention: Not much, insiders say, as long as Shangri-La’s development does not outpace its support network.
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