We are looking at long-term prospects: Jetwing Chief

The Jetwing Symphony will join the Colombo Stock Exchange as the youngest listed company on December 14, with an initial public offering (IPO) hoping to raise up to Rs. 904 million to retire past debt and invest in upcoming hotels. We sat down with Jetwing Group Chairman Hiran Cooray for an exclusive on the upcoming listing and the tourism industry prospects. Here are some of the excerpts:

Why did you go for the IPO at this point of time?

Good question. When we started Jetwing Symphony, at around 2011 and 2012 we also had a private placement and at that time many invested with us, and we gave them an undertaking that by 2018 we would go public, and that the decision to go public would be made by non-Jetwing directors on the board of Jetwing Symphony. The two Jetwing directors are myself and my sister Shiromal Cooray. The rest are all outsiders. So we said that we’re not going to vote on it, the others will vote on it, and based on our financial advisors Capital Alliance, a board decision was taken that we will go public now. The other reason for going public is that we wanted to wait till most of the hotels were completed. Five hotels are now in operation, so now we thought okay, people are going to invest in a company which has five completed hotels and a sixth hotel is about to be started. So that’s why we thought we should go public now.

So the Rs. 1.2 billion private placement was in 2011?

The private placement was 2012 onwards and it was completed in 2016 in stages.

What prices were the shares then given at?

At Rs. 11.

I saw that EPF was a big shareholder. Why did the EPF invest when the company was not yet making profits?

It’s the confidence that they had in us. We only gave them our proposal, and they obviously felt that we were a serious company focused only in tourism and hospitality, and we always look at the long term. So it was the confidence they had in us and of course the tourism sector itself. We also do a lot of community development work involving the local communities.

In Jaffna, you would have seen how the local boys who serve, who couldn’t speak a word of English, who had grown up with bombs and guns rather than anything else, we have trained them and completely transformed them and they’re working with us, so likewise, similarly, we just opened a hotel in Pottuvil under Jetwing Symphony and we have 12 to 16 Muslim youth who are working there. Normally they don’t like to work in hotels and that’s an entire Muslim village; Pottovil is a 95 percent Muslim village, and they’re supportive of us. It’s the way we operate and get involved with them. I think that’s the confidence they have in us. We never asked them why they invested, I’m just telling you my version of it.

It’s public money. They invested in around 2012-2013. So, for 5 years, the company hasn’t given any returns. Did you stress that this would be the case?

Yes, of course. In the financials we gave them, you can see that. But, there is also value creation. EPF is government funds, its people’s funds rather, so you also have to look at the long-term value creation, and the people benefit from this, so that money also comes into this.

Why did you decide to go for a book building exercise?

That was the advice given by the financial advisors, and they felt that instead of us determining the price let the market determine the price. If you feel it’s only worth Rs. 15, you could go at Rs. 15, but somebody else feels it’s worth Rs. 18, they could choose that. Sri Lanka has had an IPO before 9 years ago or whatever when Dialog went public, that was a book build, now this is the second time. We’re giving the option to the investors.

Hotel share prices have been continuously falling. Couldn’t you have gone to the market earlier and gotten a better value per share?

Probably, if we had flung it out at that time and shown them the coconut trees and asked people to invest, sure. Well, people did invest on bare land.

Or you could have waited a bit to see if the market strengthened?

Either way, yes.

Exactly. So, why now?

Well, we’re not doing it to make money for ourselves, right? So, we’re issuing fresh shares which are coming into the company. We’re not selling our shares. So we will reduce our holding. So, to us, the undertaking that we would go public by 2018, that’s important to us. That’s why we kept to our word. But you’re right. If we kept it for another three years for the company to become more profitable, you could have gotten double this money.

Speaking of that, tourism arrivals so far this year aren’t doing well, maybe that is affecting the share prices of hotel companies as well?

Well, overall the share market hasn’t been doing that well.

It had picked up somewhat this year.

It had picked up.

So what’s the confidence of tourism operators that arrivals would boost up again? When will that happen?

Two things. One is if you’re looking at the arrivals up to now, it’s purely on the safety and stability factor. The destination has not been properly marketed. If you look at a newspaper, people in the industry, not only ourselves are crying out. Because we have the money. The industry contributes, the Departure Tax comes in, so there are funds available in the Sri Lanka Tourism Promotions Bureau, and we are crying out for a properly planned destination promotion and marketing campaign. 

Be that as it may, we are getting tourists now based purely on the safety and stability aspect. So, the confidence we have is that without even a proper marketing campaign this amount of tourists have come in, and we are hoping that by 2018 a marketing campaign will be launched positioning and branding the destination. So the numbers will rise further. The government has managed the international relations very well. I think that’s also very important for tourism. On the reconciliation factor also, slowly but surely, the government has managed reconciliation well, and all of this has contributed to tourism growth, and as you can see, the North and the East will continue to blossom from tourism. And we are a company only in tourism and hospitality, and all the money we made in the last five to six years is back in Jetwing Symphony to develop, and we’re  43-44 years old now as a family in tourism, and we’re in it for the very, very long term.

So, these campaigns are forever getting delayed. Will we ever see them happen?

Hope so. 

The supply of hotel rooms is fast outpacing demand. Are there any concerns there?

Definitely. That’s why with the promotion and marketing, the arrival numbers have to go up. Then, who knows, in another three years’ time, we might say there’s a shortage of rooms again. Now we’re handing 2 million people, and there’s a possibility of having four or six million people by another five to eight years’ time. You never know how the trend will go. Take a country like Thailand, gets 30 million tourists.

So, are you going to the market before hotel share prices fall further due to oversupply?

Definitely not. For us, we are very confident of our product. We’re very confident of the service delivery. We’re confident of the markets, so it’s a matter of time before these companies start making money.

So, up to now only Jetwing Yala has been making a profit in Symphony, correct?

Correct, and we did it in two years. So the others, most of them went into operation this year, so we’re looking at by financial year 2019, all of them to be profitable. From some of the proceeds from the issue, we will retire part of the debt, and that will also cushion those companies as well.

Isn’t Symphony highly leveraged?

Not high. We’re now 45 percent leveraged. Probably after this, we will go down to 40-42 percent. So, some companies might go for 60 percent borrowings and 40 percent equity. We aren’t comfortable with that, and that’s why we want to reduce debt as much as possible.

Is Jetwing Lake going to play the biggest role in Symphony in the future?

Well, Lake and Colombo and Yala. Yala is already playing a big role, having already turned around, but Lake of course, with more rooms, higher occupancy and the potential to attract higher rates, would play a bigger role.

Under Symphony, another hotel is currently being planned in Kandy. Any update on that?

We have got the approvals now. We will probably start building by February next year.

Didn’t the IPO documents say that you hadn’t gotten approval?

We just got it a few days ago. I think last week.

What’s the concept like?

It’s fronting the Mahaweli River, and the plan is to do 22 suites. It’s a very high end hotel. There’s very few high end boutique hotels in Kandy, so we’re going to compete in that space, rather than in the saturated US$ 80 room market. So we will do suites, with a good spa, food. A relaxed space.

So in the Surf range?

Yes. Surf is very high end, the first of its kind in the Pottuvil, Arugam Bay area, and we will bring a lot of people who didn’t go there because there was no high end property there.

The IPO also mentioned developments in Uppuveli. What are they?

We own 19 acres of land in Uppuveli. After the completion of this, the next project will be that.

Is it one project, or two?

It’s adjoining one another. After we bought 12 acres only we managed to get other people to sell land to us, so it comes in three blocks, but it will eventually be two. It will be a mixed development with a hotel and villas.

Any timeline for that?

That might take a little longer. We might wait till most of Kandy is completed and then start planning for it probably middle of next year. And when you start planning, it takes about a year to get approvals.

Will it be high end as well?

We’re debating on a more budget hotel at the moment. We haven’t finalized. The villas will be for more like real estate development, to sell the villas. 

Any expansion ideas after Uppuveli?

Jetwing Symphony, one of the goals that we have is that we would like to take Sri Lankan hospitality outside. If things go according to plan, within the next two to three years we can look at investing in other destinations. We’re particularly interested in Cambodia, Laos and Myanmmar, because we think our model can be very easily introduced there, and our Sri Lankan hospitality can be exported to those countries, our community relations, and our sustainable development.

Some of these countries could become unstable. Isn’t that a concern?

Definitely. Of course, we will always keep monitoring how it’s turning up.

What happened to the Maldives plan?

We looked into the Maldives. We missed the bus. We should have gone into the Maldives in the 1990s and that didn’t happen. We didn’t take the risk and go in there, and now it’s very costly to go in, and we don’t think we will go there.

How do you differentiate Symphony from the rest of Jetwing? Is it for a specific segment of hotels?

No. Symphony is the new vehicle for growth for us, so Symphony will invest in tourism related projects, obviously, but it will also have a budget brand called hotel J. So if we think it’s advisable for Symphony to build a budget hotel, Symphony will own that as well. It’s not necessarily limited to a segment. Symphony has Lake and Yala and Colombo, which are almost 100 rooms at each of those places, and also owns Kaduruketha and Pottuvil; Jetwing Surf, which are 20 villas and 24 villas, again different styles and all that, but wherever we think Symphony can invest and make money, we will go for them.

Will all new projects go into Symphony?

In the future, yes. The first right of refusal will go to the Jetwing Symphony board. If the Symphony board is not keen on proceeding, and we have another partner, we will go ahead, but the first right of refusal will go to Jetwing Symphony.

‘‘We looked into the Maldives. We missed the bus. We should have gone into the Maldives in the 1990s and that didn’t happen

Will Symphony manage hotels as well?

No. Management is different. Management is by Jetwing Hotels Limited which does only management of properties.

You’ve now got a lot of small villas such as Oatlands and Warwick Gardens. Are most of them managed?

Most of them are managed. Either we have taken on a lease or a joint venture to manage them. Warwick Gardens is Jetwing owned, but I would say around 80 percent of them are managed.

Will Symphony go into this villa space?

It’s very unlikely that Symphony will go into villas, because there’s not much money in them.

But it seemed that Jetwing was increasingly going into villas?

Yes, we have been. We’re still looking at it, whether we should continue doing villas, because a lot of effort has to go into it but the return is not justified at the moment.

For a while, it almost seemed like you had changed the direction of Jetwing. So will Symphony look at bigger properties?

Well, if we can invest in a villa and we can make substantial return on it, yes, we will invest.

Why weren’t your older, bigger and more profitable properties, like those in Negombo, not included in Symphony?

I’ve explained this before, but it’s good that you asked. Our founder, my father Herbert Cooray, didn’t want to go public. He always felt that what he developed and built must be kept separate. He passed away in 2008, and we can’t change his thinking now, and in the meantime, when tourism revival started in 2009, a lot of people were asking us to go public and go for consolidated accounts. That’s why we thought all the new properties that we start now, we will have a holding company where we will invite outsiders also; both Sri Lankan and non-Sri Lankan to invest with us and benefit, and we’ve structured the company in such a way that Symphony owns hotels A, B, C, D and E, and if for hotel B we get an offer from you for US$ 50 million, we can sell it to you for US$ 50 million. So, there is no attachment for any of these; it’s purely business.

What about Jetwing Jaffna? 

Jetwing Jaffna was different because another company owned the land, and we are a minority shareholder. So they invited us to manage it and own a stake in it, and we were keen to do something in Jaffna and that was the only land to do something, although of course it’s a small block of land. We’re going to manage another property there again. No investment. It’s owned by a gentleman from Jaffna and we will manage it. It’s called North Gate.

You said that Symphony would make returns from 2019. With IPOs, we’ve seen that companies are reluctant to pay dividends even after making profits. When can Symphony shareholders expect dividend payouts?

Look, we have put in all our money, I need some money back as well, right? If we don’t pay dividends, we won’t get any money. And the other thing for people to see is that our other public company is Lighthouse, and Lighthouse has been paying dividends. Minimum 70 percent has been distributed. We like to keep all our shareholders happy.

How will Symphony tackle the shortage of labour in the market and Sri Lankans going abroad?

It’s a cycle. We train them, they go, they earn more money, they come back. Youngsters, it’s difficult to keep them here all the time. We have a programme called JYDP. Jetwing Youth Development Project where will take kids over the age of 18 and teach them English and hospitality skills. It takes them six to eight months to come out of the shell and work the front line, and three years down the road they get all the confidence and they go, but most of them come back after three to five years, and we welcome them back. But more and more people are joining hospitality now. There’s opportunity to make money, opportunities to travel, meet people and all those things, so kids get excited.

So what are the biggest challenges for Symphony?

Well, that’s one of the challenges; human resources. Marketing and positioning is a challenge, not only for Symphony, but the destination itself. We need to really focus on that and get the message out to the world that Sri Lanka is offering a high end product, there’s good food, that infrastructure and road network is there. It needs to be constantly communicated. We need to have home stays and all that, which are also important, but need to showcase the best of what we’ve got to the world. Everybody will come. Not everyone will stay at the best of hotels, but we have to attract the best to the country. 

And tourism is a very sensitive industry, you cough too much, people stop coming. It’s not only terrorism, mosquitoes, floods, cost of airline fuel going up, and government taxes going up will affect tourism. They will affect most industries, but it will affect tourism particularly. I think the government is focused, but the risk factors are there. So concerns are there. But we have put in all our money. If we were safe people we would have put our money in a bank, get 10 percent interest and sleep happily at home, but then there would have been no growth. The country needs development, and Jetwing plays a big role to develop hotels and travel.

You say that home stays are important but a lot of hoteliers don’t seem to feel that way, do they?

No. What they are requesting is a level playing field. That they pay their dues and they are monitored properly, that there are no hiccups and that they are looked after properly. If that is the case, if they pay their taxes and money comes to the country, it’s fine, hoteliers will be happy.

With Colombo Seven, you now have a city hotel, so what is your view on the minimum price, which the government wants to remove but hotels are constantly managing to successfully lobby to maintain?

 Well, my wish is for the rates to keep going up, not coming down. The introduction of the minimum rate was very healthy for the tourism industry at large, because otherwise, when Colombo sells at a low price, outstation hotels could sell for even lower. So my wish is for prices to increase further, not reduce. We should be ashamed. What’s the point of reducing the price and bringing people here? I don’t know. It’s a loss for the country. We’re subsidizing the people coming here. So if the prices are high, more taxes, more revenue for the government. More revenue for the staff, they get a higher service charge, and we’re compelled, as managers and owners to provide a better service.

But shouldn’t the increased price come from the hoteliers providing a better service, instead of a minimum price?

I agree with you. True, but some lack that confidence to stay up on their own. That’s why there needs to be a little push.

So are you saying there should be a further increase in the minimum rate?

I’m not saying that. I’d get stoned. What I’m saying is to me, the minimum rate is irrelevant, because I want to see the prices go up further, but the people demanding it to be taken out are the ones who want the prices coming down. What’s the point in getting 5-star hotel rooms for US$ 75? Who’s going to make money? Hotels were in a depressed state. During the conflict, you could get the Colombo Hilton for US$ 40. What does the hotel make? We don’t want that happening again. The Colombo Hilton should be selling at US$ 400,  and then only people will look and say ‘Ah, look, it’s doing well. Sri Lanka is the place to go’.

How can Jetwing Colombo tap into the MICE market?

We already have a team marketing into the MICE market. Of course, ours is a smaller property. We can have small meetings. Not at a massive scale. Cinnamon Life, Shangri-La, Cinnamon Grand competes in that market. Smaller functions, birthday parties, that we’re looking at.

Couldn’t all the city hotels invested in a joint venture vehicle to build a MICE facility?

That’s the ideal way to do it, but who would do it? We looked at it in Deniyaya, but it didn’t work out. Too many cooks, what happens? Spoils the soup.

Will we see more mergers and acquisitions in the industry in the future?

Well, some of the companies that invested at the start of the tourism revival aren’t doing well now, so maybe, yes.