The Erawan Group

Best play on “De-seasonalization”

ERW is best positioned to gain from the blurring of seasonal lines in the Thai tourism structure brought by growing short-haul tourists: more arrivals in low season means higher occupancy rate and RevPar, an important earnings driver. This plus its high operational leverage lead us to expect it to break the tradition of red ink in low season and instead show a profit. We raise 2015F by 22% and 2016F by 8% to factor in the better RevPar outlook, which lifts our end-2015 TP to Bt7 based on 15x EV/EBITDA (from mid-2015 TP of Bt5.7 based on 13.5x EV/EBITDA).

Thai tourism is morphing into lower seasonality. Tourist arrivals from short-haul destinations into Thailand have clearly shifted into an uptrend since 2009, surging at a CAGR of 23% versus 11% from long-haul destinations. The less seasonal travel pattern of tourists from short-haul destinations is causing a shift in the traditional mix of low and high season tourist arrivals. This is evident in the 19% CAGR of low season tourist arrivals versus 15% for high season from 2009 to 2013. 

No red ink in low season. As a pure hotel play, ERW’s earnings are most influenced by seasonality and it generally sank into the red in low season. This positions ERW to gain the most as the lines of seasonality blur, as more arrivals will raise occupancy rate and consequently revenue per available room (RevPar) - ERW’s key earnings driver. A better operational matrix will lead to profit in low season, breaking the traditional earnings pattern of losses. This stance was confirmed when ERW’s operations in 3Q13 were only inches away from the black with a loss of only Bt6mn. We also expect the lower low season to bring stronger earnings accretion backed by rises in both volume (occupancy rate) and price (average room rate: ARR): the gap in ARR between high and low season is wide at ~15%, implying room for a higher ARR increase in low season.

Jump starting in 4Q14. Thai tourism is revving up: October’s international arrivals finally showed YoY growth after YoY contractions since February 2014. ERW’s Bangkok hotels (more than half of its revenues) are recovering well, with a rise in occupancy rate to 82% in October and 89% in Nov 1-15 (vs. 78% in 4Q13 and 71% in 3Q14). Revenue per available room (RevPar) for Bangkok hotels turned to positive growth YoY after a YoY contraction since 1Q14. With this, we expect 4Q14’s earnings will show a profit after red ink in 2Q-3Q14 and be its best for this year. Management says 1Q15 forward bookings are high, particularly for the mid-to-low segments served by its economy hotels.

BUY rating; TP increased to Bt7/share. We raise ERW’s core earnings forecast by 22% in 2015 and 8% in 2016 after raising our RevPar assumption by 3% in 2015-16. Our end-2015 TP goes up to Bt7/share based on 15x EV/EBITDA (+1.0SD of regional historical average) from mid-2015 TP of Bt5.7/share based on 13.5x EV/EBITDA (regional historical average). As we are heading into an uptrend for Thai tourism, we like ERW best for its high revenue exposure to the hotel business and high operational leverage that offers earnings surprise on the upside (our sensitivity study suggests a 1% change in 2015 RevPar assumption increases 2015 core earnings by 3%). In our view, ERW is the best play on de-seasonalization, which is eliminating the usual low season red ink.