Central Plaza Hotel

Hotel occupancy climbing. We attended the Opportunity Day meeting yesterday, at which management offered an upbeat view on recovery in its hotel and food businesses. At hotels (45% of total revenue in 1H14), overall occupancy rate has risen to 72% in July and 78% in August from 69% in 2Q14, mainly from Bangkok hotels (21% of hotel revenue in 1H14), where occupancy rate has recovered well to 55% in July and 65% in August from 51% in 2Q14. Operations continue strong at provincial hotels (57% of hotel revenue in 1H14) and the Maldives (22% of hotel revenue in 1H14). CENTEL reports that advance bookings suggest a strong 4Q14, with visitors responding positively to the political calm. The improvement in operations aligns with our assumption of an occupancy rate of 75% in 2014, implying stronger 2H14 at 78% vs. 72% in 1H14. 

Strong SSS in July-Aug. A highlight is the strong rebound in same-store sales growth (SSS) to 7.8% in July and 5% in August from -0.9% in 1H14, driven by a more favorable backdrop that includes stronger consumer confidence and spending and a greater marketing and promotional push. CENTEL decided to terminate the franchise with Beard Papa franchise in August as it has never been able to move up into the black. CENTEL had 18 Beard Papa’s outlets in 2Q14. It has already set aside provisions to cover any cost of early termination of the franchise contract.

Upside on expected lifting of martial law. Local news reports that on Friday the junta will look at lifting martial law in some areas, notably in tourist destinations; if they do, it would be ahead of our expectations of 4Q14. This would do much to burnish the industry backdrop by reducing or eliminating travel alerts and bring back visitors, particularly from markets that are highly sensitive to political issues, such as China. All hoteliers should benefit from higher occupancy rates and ability to raise ARR. Our sensitivity analyst (Figure 3) suggests 2-19% earnings upside for CENTEL in 2015 on stronger-than-expected occupancy rate and ARR than our assumption of 81% occupancy and 8% YoY ARR increase; the reverse is also true. 

Maintain BUY. We maintain our positive view on CENTEL, expecting a strong earnings rebound in 2H14 (56% YoY and 39% HoH) and high 71% growth in 2015, aided by the return of growth to Thai tourism. The lifting of martial law brings with it upside to earnings. Among hoteliers, CENTEL is a laggard play: YTD share price has increased 49% vs. 76% for MINT and 60% for ERW. We BUY CENTEL.