Tourism sector

Tourism sector 

Thai tourism crippled by the political situation. Tourism in Thailand has been damaged by the lengthy political deadlock. In the first five months of the year, international tourist arrivals fell 6% YoY. Sharp contractions were seen in major markets that are highly sensitive to political climates: arrivals from China and Hong Kong contracted 22% YoY (20% of international arrivals in 2013), with Malaysian citizens falling 16% YoY (11%) and Japanese dropping 19% YoY (6%). This is expected to continue in June, going by the 24% YoY fall in AOT’s international passenger pass-through over June 1-15 and is believed to be in response to the declaration of martial law on May 20, followed by a coup and curfew on May 22, which led several nations to raise their warning levels for Thailand.
Industry nearing bottom. The intensity of the political deadlock has eased and we believe it is on the way to being resolved, which means tourism can bottom in 2Q-3Q14. Positives include the nationwide lifting of the curfew (lifted first in major tourist destinations Pattaya, Phuket and Samui), the expected setup of an interim government in August-September and forthcoming stimulus measures to boost confidence and tourism prospects. We expect the calm to release pent-up demand, especially in markets highly sensitive to politics and bring Thai tourism back to its feet, ready to enjoy the high season in 4Q14.
Most tourism-related plays are below pre-crisis prices. We believe tourism plays have not yet truly factored in the brighter prospects for tourism. Since November last year, when the political unrest began, prices for all except MINT, which has outperformed the SET and peers, are still under pre-crisis levels.
Top picks: ERW, AAV and AOT. We expect tourism-related stocks to report their lowest earnings in 2Q-3Q14 and then start moving up in 4Q14, matching the industry’s movement. Of all the tourism-related stocks, we like ERW, AAV and AOT. In hotel stocks, we like ERW because, as a pure hotel play, the recovery will be seen most clearly on its bottom line, particularly since half of its earnings come from Bangkok hotels. For airlines, we have lowered earnings for all after the poor 1Q14. After the revision, we like AAV best because of its high exposure to the types of tourists that will be coming back most rapidly and its relatively stronger earnings growth path compared to NOK and THAI. As for AOT, as the only listed airport operator for Thailand’s major airports, it is ideally positioned to benefit from more tourists, as most pass through its airports.