The Erawan Group

The Erawan Group Plc (ERW)

Investment thesis
We preliminary estimate that the planned hotel expansion unveiled by the CEO, Mr Kasama Punyagupta, yesterday would add Bt0.3-0.7/share to our YE13 target price of Bt6.80 (trimmed from Bt7.00 to factor in BLS’s market return assumption change from 12.1% to 12.4%). Following the 2Q13 sell-off, ERW trades at 38% below its replacement value of Bt6.27/share. BUY!

New budget hotels under proprietary brand “HOP INN”
After two years of feasibility studies and team-building, ERW will launch “budget” hotels (lower priced than the ibis-branded “economy” segment) under a new proprietary brand, “HOP INN”, making it a hotel manager as well as owner. The target client group is domestic business travelers (no seasonality) with an ADR of Bt600. The investment cost is low at Bt0.73m/room. The market niche is very fragmented. ERW believes HOP INN will be a better quality product.
The firm has bought nine land plots on which to build HOP INN hotels in Ubon Ratchathani, Mukdaharn, Nongkhai, Udonthani, Nakorn Ratchasima, Sakaew, Kanchanaburi, Maesot (Tak) and Lampang. ERW plans to open 25 HOP INN hotels in Thailand and five in other ASEAN countries by YE15. The HOP INN contribution to EBITDA is targeted 15% by FY16. ERW has a Bt2.9bn budget hotel CAPEX plan for FY13-15. A cash call is unlikely, as the net gearing ratio will fall to 1.3x at end-June. At a net gearing of 2.0x, ERW would have additional debt capacity of Bt3bn.

Value accretion to our model in 2H14 onward.

Conservatively assuming that 10 HOP INN hotels will launch in 2H14, we calculate that they will add 1% to our revenue forecast for FY14 and 2% in FY15. Our projection would be expected to rise for FY15 by 4% for EBITDA and 5% for net profit.

From hotel owner to manager
Apart from HOP INN, ERW has changed the management contracts for its Mercure and ibis hotels to franchises (effective July 1). With seven years’ experience in ibis, we view that ERW has the capability to operate in the economy and budget segments. The key benefits of managing hotels are a higher profitability ratio (no management fees) and, over the long-term, opportunities for quick expansion through franchises/ management contracts.
Core operational hiccups in 2Q-3Q13 are behind us
Core operational losses in 2Q-3Q13 will be mainly due to low season and renovations at the Grand Hyatt Erawan Bangkok. We estimate core losses at Bt50m for 2Q13 (a core loss of Bt15m in 2Q12) and Bt35m for 3Q13 (a Bt54m loss in 2Q12). However, 2Q13 net profit will hit record of Bt751m (an Bt860m gain from asset sales to ERWPF minus a Bt59m asset impairment for Naka Phuket).