The Erawan Group

Maintain BUY. The overall tone at ERW's meeting last week was positive. Its operational statistics are improving, particularly in 4Q14, as tourists are returning in response to greater stability in Thailand. This confirms our view that ERW’s earnings bottomed in 2Q14 and will rise to hit the year’s highest in 4Q14. We expect a turnaround in 2015 backed by recovery in tourism. We maintain BUY on ERW with TP at Bt5.7/share for V-shaped earnings recovery in 4Q14-2015. ERW is one of our top picks in Thai tourism sectors. 

3Q14F: Loss but less. We estimate 3Q14 core loss at Bt86mn, shrinking from Bt133mn in 2Q14 but worse than the Bt6mn core loss in 3Q13. Backing the QoQ improvement is higher occupancy rate at established hotels (rates are still low at the newer HOP INN budget hotels) to 66% in 3Q14 from 61% in 2Q14 (but still below 3Q13’s 77%) while ARR (ex. HOP INN) has risen 5% YoY and 5% QoQ. Including Bt3mn extra loss in 3Q14 (net of Bt11mn pre-opening expenses for new hotels and Bt8mn gain on sale of three shophouses) and Bt50mn extra gain in 2Q14 (gain on provision reversal and sale of five shophouses), ERW will report a net loss of Bt89mn vs. net loss of Bt83mn in 2Q14 and Bt6mn in 3Q13. 

4Q14 to be the strongest of 2014. If 3Q14F is as expected, our full-year forecast suggests 4Q14 core profit of Bt74mn, up 28% YoY from Bt58mn in 4Q13, making 4Q14 the year’s best. We believe our forecast is achievable on better operations at ERW and because fourth quarter is the traditional high season for tourism. ERW says forward bookings are strong and, if the momentum continues, it expects 4Q14 occupancy rate (ex. HOP INN) to reach ~77%, near 4Q13’s 78%. This is a step in the right direction after sharp YoY contractions in occupancy rate since 1Q14 (Figure 2). Main drivers are hotels in Bangkok, where average occupancy rate shot up to 80% in the first two weeks of October from 71% in 3Q14 and 78% in 4Q13. 

Positive guidance for 2015. ERW believes tourism will recover in 2015 and expects hotel revenue growth of 35% YoY: 30% YoY at existing hotels and 5% YoY at new hotels. In terms of operations, the key to growth is a rise in occupancy rate to 82% (from 65% in 2014); ARR is expected to grow an average of 4%, mainly in the luxury hotel segment where it will increase by 8% YoY.

Expansion. ERW will open ibis Krabi (206 rooms) in November and Mercure Pattaya (210 rooms) in December. 2014 will end with 28 hotels and 5,289 rooms. The first overseas HOP INN, in the Philippines, is underway and is expected to open in 2016. In 2015, ERW plans to open 8 HOP INN hotels, mainly in Southern Thailand. It also expects the setup of its REIT in 2Q15-3Q15.