Tourism (hotels)

Tourism (hotels)

The growing number of international tourist arrivals and high occupancy rate for hoteliers suggests a strong low season. Importantly, the occupancy rate gap between high and low season is narrowing, confirming our view of fading seasonality for Thai tourism. High occupancy rate means room to increase room rate – the secondary driver of growth with no additional cost - in the future. Our top pick is ERW as it is set to show the first core profit in low season since 2009. 

 

Growing arrivals: China is strong and Russia is returning. According to Department of Tourism of Thailand, international tourist arrivals grew 10% YoY in April and 8% YoY in May. China was the main support: tourists from that country grew 14% YoY in April-May, and at 30% of total international tourist arrivals in 5M16, was the biggest single contributor. Another positive is we are seeing more tourists from Russia (4% of total international tourist arrivals), up 17% YoY in 5M16 after sliding since 2Q14. However the number has yet to climb back up to pre-crisis level. 

 

Occupancy rates high even in low season. In April-May, occupancy rate (excluding its HOP INN budget hotel) for ERW was high at ~85% and occupancy rate for owned hotels in Thailand was at ~80% for CENTEL and ~70% for MINT. Importantly, the occupancy rate gap between high and low season is narrowing, confirming our view of fading seasonality for Thai tourism. ERW is the best proxy, with a hotel portfolio extending from the high to low segments. ERW’s occupancy rate in April-May at ~85% is very little below 1Q16’s 88% and the occupancy rate gap between high and low season at ~3% is also lower than its ~15% historical average for 2008-12. Going forward, when occupancy rate is high in what used to be low season, we see room for hoteliers to increase average room rate (ARR) even in the low season. This is important, as a higher ARR is the secondary driver for revenue per available room (RevPar) growth and comes at no additional cost. Stronger low season operations means better operations overall. Of hoteliers, ERW is best positioned to benefit from this trend as it is a pure hotel play with the highest exposure to Thai tourism.

 

Brexit may hit Thai tourism but the growing short-haul market will dilute the impact. The United Kingdom’s decision to leave the EU has raised concerns about those economies and consequently Thai tourism: Europe and the UK account for 19% and 3%, respectively, of tourist arrivals in terms of volume. In terms of spending, they are even more important at 28% and 5%, respectively. In our view, the hit to Thai tourism will be greatly moderated by the structural change involving strong growth in arrivals from short-haul markets such as East Asia. East Asia has now become the largest source for Thai tourism at 65% of total arrivals and 54% of total spending. By country, China is the biggest at 27% of total arrivals and also of total spending. 

 

ERW is top pick. Catalyst is its first profit in the low season. Of hoteliers, ERW is our top pick; the short-term catalyst is its first profit in the low season since 2009 at core profit of Bt7mn – improving from the Bt25mn core loss in 2Q15 but down seasonally from Bt189mn profit in 1Q16. Including Bt12mn extra gain on sale of four shophouses, we estimate ERW’s net profit at Bt19mn in 2Q16. We BUY on ERW with TP at Bt6.5/share.