Tourism

Tourism 
- Flood of positives: Strong stats, government support and earnings up-cycle
- ERW and CENTEL are top buys
2Q13 earnings recap – Low in the low season. All hoteliers in our coverage (CENTEL, ERW and MINT) reported strong YoY core earnings growth bolstered by solid growth of international tourist arrivals in the quarter of 5.9mn, up 21% YoY but down 13% QoQ on seasonality. For CENTEL and MINT, their strong hotel businesses helped offset the weaker food business, eaten into by the consumption slowdown.
Flood of positives. Over the three months, we believe hoteliers’ share prices will outperform the market, supported by a flood of positive factors:
- Record high stats in August. International tourist arrivals in August hit a record high of 2.5mn, up 28% YoY and 11% MoM. Main drivers are China (+79%), Malaysia (+24%) and Russia (+4%). Strong industry statistics in July and August imply that the tourism industry already passed bottom in 2Q13 (low season is typically 2Q-3Q). For 8M13, international tourist arrivals grew by 21% YoY to 17.4mn.
- Government support. In addition to entering high season in 4Q13-1Q14, several government measures will be providing support to Thai tourism:
1) Juristic persons will be allowed to claim up to two times actual expenses incurred from organizing training-related seminars in their corporate tax filings in the 2013 and 2014 accounting years. (Already approved)
2) The government will provide multiple-entry visas that are effective for several years to encourage more repeat visits. (Studying)
3) The government plans to promote Thailand as a shopping paradise by cutting duties on luxury items. (Studying and expected to finalize this year)
- Earnings up-cycle. After passing bottom in 2Q13, we expect earnings for the tourism sector to cycle up in 3Q13 and peak in 1Q14.
Impact from drop in Chinese tourists may be less than expected. There is a concern that the number of Chinese tourists will fall as China’s government plans to fix the “zero-dollar tour” problem by raising prices to a more reasonable level for package tours to several countries including Thailand, effective October 1. However, we expect any impact to be short-lived and several pieces of information suggest the magnitude of the impact may be less than feared. For example, ERW guides that September’s occupancy rate for ibis, its lowest hotel segment, was higher YoY and it has not, so far, seen a material fall in Chinese tourists. Also, Thai Smile will be introducing more routes into China - to Chongqing and Changsha - in October and Thai Air Asia is boosting frequencies of flights to China cities it already flies to and plans to add new cities.
ERW and CENTEL are top buys. We like ERW because it has the best exposure to the good outlook for Thai tourism as a pure hotel play and it is also a market laggard. We prefer CENTEL to MINT as it has higher earnings contribution from the hotel business (~60% for CENTEL vs. ~35-40% for MINT) implying more benefit from the strength of Thai tourism, which will help dilute the impact of weak food business. For MINT, though upside gain to our TP is attractive, concerns about the drag from a slowing in its food business will pressure share price in the near term.