Erawan Group

Erawan Group Plc (ERW) 

 

The overall tone was positive at the analyst meeting yesterday: operations are improving, especially at Bangkok luxury hotels, supplying the bulk of its earnings. We expect arrivals to continue to strengthen, particularly from short-haul destinations, allowing ERW to report a profit in its usual low season in 3Q15, breaking the traditional earnings pattern of losses. We rate BUY with TP of Bt7/share.  

 

Strong operations QTD, notably in luxury hotels in Bangkok. ERW reports a strong 18% YoY rise in QTD revenue per available room (RevPar) (excluding budget hotel HOP INN) thanks to a jump in occupancy rate to 74% (from 67% in the same period last year) and a 3% YoY increase in average room rate (ARR). Operational growth is being fortified primarily by its luxury hotels in Bangkok (Grand Hyatt Erawan Bangkok and JW Marriott Bangkok), together contributing 64% of revenue and 66% of EBITDA in 1Q15. RevPar has surged 40% YoY, fueled by a high 79% occupancy rate (vs. 51% last year during the political unrest). We note that the 79% QTD occupancy rate for luxury hotels in Bangkok beats the 67% for 2Q13, a strong period for Thai tourism before the political meltdown. 

 

China the largest feeder. In 1Q15, tourists from China numbered 2.6mn, up 105% YoY and 35% QoQ, at 26% supplying the largest share of Thailand’s total international tourist arrivals. This is filling ERW’s rooms, as China is its largest feeder, contributing 13% of ERW’s room revenue in 1Q15 (from 9% in 2014). We are positive toward the growing contribution from Chinese tourists, with China settling in as pivotal for Thai tourism and, importantly, these tourists are less seasonal, meaning less quarterly volatility for ERW going forward.  

 

Four new hotels in 4Q15, REIT in 2H15. ERW has set capex of Bt1.7-1.8bn in 2015 to set up 15 HOP INN hotels, with four scheduled to open in 4Q15 and 11 (10 in Thailand and one in the Philippines) in 2016. It is in the process of setting up a REIT, into which it expects to divest one to two hotels. It expects this to be finalized in 2H15.  

 

Expect profit in low season in 3Q15. ERW’s earnings in 2Q15 are likely to soften QoQ on seasonality and we preliminarily estimate a small loss of ~Bt20mn in 2Q15, far better than the loss of Bt133mn in 2Q14, representing outstanding YoY earnings improvement. Based on our view of stronger arrivals from short-haul destinations during the traditional low season – mainly from China - occupancy rate and thus RevPar will rise, leading to profit in low season, breaking the traditional earnings pattern of losses. We expect this to show up in 3Q15.  

 

Maintain BUY with TP of Bt7/share. Despite the growth in Thai tourism and earnings improvement, ERW’s share price has declined by 3% YTD compared to the SET vs. +12% for CENTEL and +2% for MINT, implying that the market has not yet priced in the positives. We maintain BUY with TP of Bt7/share.