CDL under fire

Sunday 1st July 2001

Shareholders attacked CDL Hotels for a complex payment to its parent company. What they didn't point the finger at was the small matter of CDL's lacklustre performance.

They started out as Mr Wilson and Mr Sheppard and ended up as John and Bruce. The scene: the annual meeting of hotel chain CDL Hotels and the first foray for the fledgling New Zealand Shareholders' Association. Dressed in his trademark shorts and sandals, shareholder campaigner Bruce Sheppard grilled the well-groomed company chairman John Wilson about the complex $2.1 million "subvention" payment to its parent company, CDL Hotels Holdings NZ. By the end of the meeting, the pair were on first-name basis.

All very lovey-dovey.

They shouldn't be. While the payment was worth poking a stick at, shareholders failed to pry at the far bigger problem: CDL's lousy track record. The share price is currently trading at 19 cents (when its assets suggest it should be around 60 cents) and has halved in the last two years. Net profit has plummeted from $15.4 million in 1996 to just $1.4 million in 2000. And while tourist arrivals leapt by 11% in 2000, revenue from CDL's New Zealand hotels increased by only 2% and its average occupancy rate hardly changed. That's despite the fact 62% of its hotel income is from international visitors.

No wonder the country's largest hotel chain (29 nationwide) has earned the sobriquet CD Hell. But its majority owner, Singapore-based Hong Leong Group (via Millennium & Copthorne in London), hasn't done too badly out of its nine-year investment. Despite tough times, the chain has continued to pay good annual dividends - around 70 cents in the dollar since 1996.

But really, it's the Singaporeans who are said to have made a bad situation worse. The trouble began in the mid 1990s when, in response to over-supply in the main centres, CDL started discounting room rates. This was disastrous for the company and the industry, says Ernst & Young tourism principal Stephen Hamilton. "Rather than a strategy owned by local management, it is widely understood in the industry that [the discounting] was on instructions from Singapore to fill the rooms: 'do what you have to do to keep the hotels full'."

Bottoms in beds

To get an indication of the competition, total hotel room nights available in Auckland grew from just over one million in 1995 to 2.25 million in 2000. A night at the Copthorne Harbour City went from $168 per night in 1995 to around $115 in 2001. Average yield in the five major metropolitan areas was $94 a room in 1994; it had dropped to just $78 per room by 1999.

Great news for business travellers. Bad news for travel investors.

Enter lawyer and now Tourism Board director Lex Henry. Made chief executive in mid-1999, Henry switched from discounting and cutting costs to boosting returns and service. He increased rates by as much as 10%, to the consternation of some in-bound tour operators. But they paid. Last year CDL's room rates increased again, by 1.1% compared with 1999.

Henry only lasted a year, replaced by Tsang Jat Meng, but his mark remains. Tsang is pursuing a number of Henry's new measures, such as a branding exercise to distinguish between the Millennium, Copthorne and Quality hotels. Henry's formal staff training and development has lowered its high staff turnover by up to 15% in the past 18 months or so, the company says.

So how does shareholder advocate Sheppard rate the company performance now? Less than adequate, he admits. But he thinks that moving away from its discounting strategy is on the right track. And this year's profit was hit by spending up to $10 million on long-avoided hotel maintenance, he says.

Part of CDL's image problem is its notorious lack of disclosure. The annual accounts are complicated by the inclusion of its subsidiaries, 61%-owned CDL Investments and 51%-owned Kingsgate International. It is difficult to tell from these accounts exactly how much CDL Hotels pays for being part of the international Millennium & Copthorne group or what benefit this returns. Wilson says revenue to New Zealand from the global network was "difficult to quantify" but was about 10,000 room nights a year.

Aware it was the target of shareholder activism and media scrutiny, the company tried hard to appear friendly and open at the annual meeting, in contrast to previous years' meetings. It even acted - unprompted - to set up an audit committee of external directors to liaise between the auditors and the board. But when it came to the subvention payment it fluffed its lines badly.

The biggest question for investors - how is CDL doing compared with its peers - is shrouded by exactly this reticence. It's partially fuelled by the fact that CDL is New Zealand's only listed hotel operator and its competitors don't have to front up publicly with their figures. Based on industry feedback, CDL's ability to contain costs means it has done as well as can be expected in the market, possibly better than most, says Hamilton. But really, that's a guess.

In CDL's favour the general outlook for the industry is positive. The latest Statistics New Zealand accommodation survey for March 2001 shows hotels recorded their highest monthly guest total since the survey started in July 1996, with 866,000 visitor nights. The average hotel occupancy rate nationwide is 66% compared with 58% at the same time last year, and there's been little change in supply.

Wilson, for one, is feeling optimistic. He says CDL's outlook is good, with financial performance in the first four months of 2001 exceeding expectations and the hotel operations showing significant profit growth.

Could CD Hell now be moving on up towards heaven? Watch this space.

Obfuscating the complex

The chairman claimed he was confused. So did most shareholders. Even chief financial officer Anthony Lee, flanked by his KPMG advisers, stuck to a prepared statement at CDL's annual meeting. At issue was a complex, and badly explained, $2.1 million payment from CDL to its parent company CDL Hotels Holdings New Zealand � just the sort of thing the newly formed and feisty Shareholders' Association could use to demonstrate its worth.

The payment, explained Lee, bought $16 million-worth of tax losses from its parent company. These were all used in the last financial year and saved the group approximately $5 million in tax it would otherwise have had to pay.

It all sounds reasonable enough, but it didn't appease the dogged association convener Bruce Sheppard. He continued to question why this wasn't properly explained in the notes to the accounts, including how the board decided it should pay 12.5 cents in the dollar to its parent for the tax losses. A flummoxed CDL finally agreed to give Sheppard a fuller explanation at a later private meeting, and to make a notice to the Stock Exchange if he remained unsatisfied.

Round one to the bearded corner.

Fiona Rotherham
fiona@unlimited.net.nz

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