Tourism

Tourism 

In August, the number of international tourist arrivals in Thailand fell 11.9% YoY but grew 8% MoM to 2.1mn. In 8M14, there were 15.7mn international tourist arrivals, down 10.7% YoY. 

Seventh consecutive monthly YoY drop. This is the seventh month in which the number of international tourist arrivals has fallen YoY, undermined by the negative backdrop of political uncertainty since November 2013, followed by the late May imposition of martial law, leading to travel alerts on Thailand. 

#1 positive – Return of Chinese tourists. The good news is that Chinese tourists are beginning to come back, at 17% supplying the greatest number of tourists by country. Arrivals from China in August were 452,086, down only 5% YoY vs. the 21% YoY contraction in 7M14. We believe the pickup is in large part due to positive developments in Thailand’s political situation and the waiver on visa fees for Chinese and Taiwanese tourists from August 9 to November 8. After talking with AAV, a low-cost carrier with ~20% of revenue from China, we feel this rebound of Chinese tourist will continue. AAV guides that load factor on routes to/from China has risen to 80-90% in August from 70-75% in May-June and it is seeing high forward bookings in 4Q14-1Q15. 

#2 positive – Some travel alerts lifted. Six countries (Cambodia, Laos, Vietnam, Maldives, Iran and the United Arab Emirates) have removed travel alerts for their citizens coming to Thailand, representing greater confidence in Thailand’s political environment. The government is considering lifting martial law in some areas, notably in tourist destinations. We view this would do much to help by reducing or eliminating travel alerts and bringing back visitors, particularly from markets that are highly sensitive to political issues, such as China. If they do, Thai tourism should be rapidly back on its feet and ready to enjoy the high season in 4Q14.

Industry past nadir. We like ERW, AAV and AOT. We expect 2Q14-3Q14 to be the low point for profit of tourism-related stocks, with steady improvement from then on to a solid 4Q14, matching the industry’s movement led back by a return to political stability and stimulus measures to boost confidence. We like ERW, AAV and AOT. For hotels, we like ERW because, as a pure hotel play, recovery will be seen most clearly on its bottom line, particularly since half of its earnings come from Bangkok hotels. For airlines, we like AAV best because of its high exposure to the tourists that will be coming back most rapidly and its relatively stronger earnings growth path. As for AOT, it is ideally positioned to benefit from more tourists. We see upside to our AOT TP (~Bt20/share) as it plans to build a multi-terminal at Suvarnabhumi instead of the earlier planned phase 2; this will slash CAPEX to Bt24bn from Bt62bn. We have not factored this into our valuation, preferring to wait until approved by its board.

Short-term trading on NOK as a laggard. While we rate Neutral on NOK, it will benefit from the recovery of the industry. It is a price laggard, at -14% YTD and we believe this gives a short-term trading opportunity.