The Erawan Group

The Erawan Group Plc 

The positive industry backdrop and improving operational statistics lead us to expect a profit in 4Q14, after which ERW will move on to a record high in 1Q15F. ERW is best positioned to gain from “de-seasonalization” brought by strengthening short-haul tourists that will help it break its traditional low season slump. In our view, positives are not priced in, as ERW’s share has been relatively flat YTD compared to the SET. We Buy with end-2015 TP of Bt7/share. 

 

Hotels in Bangkok crowded. A talk with ERW’s management indicates improving operations, particularly for hotels in Bangkok (~70% of ERW’s revenues), driven by Thai tourism recovery. In 4Q14, international tourist arrivals hit a record high of 7.5mn, up 7% YoY and 27% QoQ, and grew 12% YoY in the first half of January. ERW reports average occupancy rate of hotels in Bangkok of a high 86% in 4Q14 (vs. 71% in 3Q14 and 78% in 4Q13) and expects this high rate will stay on in 1Q15. We note that 86% is its highest ever occupancy rate for hotels in Bangkok – the last high was 83% in 1Q13. Combined with increasing average room rate, we expect revenue per available room (RevPar) for hotels in Bangkok to grow 11% in 4Q14 and 77% in 1Q15. 

 

Turn to profit in 4Q14 and then new high in 1Q15. The positive industry backdrop and improving operational statistics suggest a net profit of Bt57mn in 4Q14, up from a loss of Bt83mn in 3Q14, though down from Bt63mn in 4Q13. Excluding the extra item of Bt20mn from pre-opening expenses for two new hotels (ibis Krabi in November and Mercure Pattaya in December), ERW will report core profit of Bt77mn, up from a loss of Bt91mn in 3Q14 and growing 33% YoY from Bt58mn in 4Q13. We expect the strong earnings upswing to continue in 1Q15 to a new high of Bt200mn from Bt2mn in 1Q14 and Bt148mn in 1Q13, the last peak.  

 

De-seasonalization = Profit in low season. We view the growing number of tourists from short-haul destinations, especially China, at 19% supplying the greatest number of tourists by country, as key for Thai tourism. We forecast 6.2mn incoming Chinese tourists in 2015, up 34% YoY from 4.6mn in 2014. 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 (see our tourism report “De-seasonalizing” of 26 November, 2014). Strong arrivals in low season will raise occupancy rate and consequently RevPar - ERW’s key earnings driver – and will lead to profit in low season, breaking the traditional earnings pattern of losses. We expect this will show up in 3Q15. 

 

Positives not yet priced in. BUY at TP of Bt7/share. ERW’s share price performance is relatively flat YTD compared to the SET, implying that the market has not yet priced in the positives. We see this as a good opportunity to reload the stock as it begins an earnings uptrend. Of hoteliers, we like ERW best for its high revenue exposure to the hotel business, meaning more benefit from Thai tourism recovery. It is positioned to be the best play on de-seasonalization, which is eliminating the usual low season slump.