HOTEL INDUSTRY

Stocks News Thursday August 8, 2019 17:10 —TRIS News Release

INDUSTRY OUTLOOK: NEUTRAL

TRIS Rating holds a neutral outlook for the hotel industry. Tourist arrivals had been growing rapidly but are growing at a slower pace this year. The slower growth rate in tourist arrivals, particularly arrivals of Chinese tourists, will make it more difficult for the Thai tourism industry to achieve its growth targets. The weak global economy and strong Thai baht remain two key challenges for the industry. However, domestic tourism is expected to grow. More domestic flights and a government tax incentive will boost local tourism.

2019 has been so far a challenging year for most hoteliers. As international tourist arrivals grow at a slower rate, many hoteliers are facing the pressure on revenues and profits. Most listed hoteliers should be able to show good financial performance in 2019, although revenue growth and profitability may not be as good as targeted. We also see a trend of rising leverage among the major hotels operators as they seek debt financing to fund new investments in the domestic and overseas markets.

KEY FACTORS

Slower growth of tourist arrivals

Tourist arrivals have been growing fast since 2015. A large influx of Chinese tourists was the main growth driver. The number of foreign tourist arrivals reached 38.3 million in 2018, up from 35.6 million in 2017. However, the tourist arrivals growth is losing its momentum lately. In the first half of 2019, the number of international arrivals was 19.8 million, up only 1.4% year-on-year (y-o-y).

Chinese visitors remain the major market for Thai tourism, as Chinese tourists accounted for 29% of total tourist arrivals in the first half of 2019. However, arrivals from China have declined significantly since the middle of 2018. A boating accident in Phuket in July 2018, plus the effects of US-China trade tensions on the Chinese economy, obviously have had a material impact on tourist arrivals from China. Tourists from China declined to 5.6 million in the first half of 2019, down by 4.7% y-o-y.

To boost tourism, the Thai government waived the visa-on-arrival (VOA) fee from November 2018 until October 2019. The VOA fee was waived for citizens of 21 countries: Andorra, Bulgaria, Bhutan, China, Cyprus, Ethiopia, Fiji, India, Kazakhstan, Latvia, Lithuania, the Maldives, Malta, Mauritius, Papua New Guinea, Romania, San Marino, Saudi Arabia, Taiwan, Ukraine, and Uzbekistan. The action seems to have worked well for some foreign visitors, especially Indian tourists. The number of Indian tourists was 1.6 million in 2018, up by 12.8%. Tourist arrivals from India continued to grow in the first half of 2019, rising by 24.1% y-o-y.

The Bank of Thailand (BOT) has revised down the number of tourist arrivals in 2019. The BOT expects the number of foreign tourists will reach 39.9 million. Weaker economic conditions around the world, plus the appreciation of the Thai baht, remain two key challenges for the Thai tourism industry.

Domestic tourism continues to grow

Domestic tourism is expected to expand due to two factors: a government tax incentive, and more domestic flights nowadays, making it easier for tourists to travel inside Thailand. The government announced in early 2019 a personal income tax break designed to boost domestic tourism. These two factors are expected to increase tourist receipts and boost the revenues of hoteliers.

Statistics show that domestic tourism has been rising steadily since 2012. The Tourism Authority of Thailand (TAT) forecasts that tourist receipts from domestic travellers will increase to Bt1.17 trillion in 2019, up from Bt1.1 trillion in 2018, an 11.6% y-o-y rise.

The tax incentive measure and the availability of more domestic flights appear to be having a positive effect on the industry. Thai tourists made 226 million trips in 2018, up by 8.5% from the prior year. In the first half of 2019, Thai travelers made 113 million trips, up 2.6% y-o-y. This volume of travel translates into Bt536 billion in domestic tourist receipts.

Impressive results on key performance metrics

The Thai hotel industry has posted impressive results on key performance metrics despite the recent drop in the y-o-y growth rate in the number of foreign tourist arrivals. For example, the occupancy rate (OR) has climbed. The average OR of lodgings in Thailand during January to May 2019 was 76.5%, up 1.1% compared with the same period in 2018. The OR of hotels in most regions improved. The one exception was the northern region: the OR decreased to 65.1% through May 2019, down from 66.5% in the same period a year earlier. Severe air pollution in early 2019 was the major reason for the drop.

The average revenue per available room (RevPar) of hotels in Thailand has risen as well. The average RevPar rose to Bt1,361 per night nationwide during the first five months of 2019. The southern region had the highest RevPar (Bt1,805 per night), while the second-highest rate was in the central region (Bt1,405 per night). RevPar in the northern and northeastern regions were Bt1,022 per night and Bt557 per night, respectively.

FINANCIAL HIGHLIGHTS

Earnings up significantly

The robustness of the Thai tourism industry is reflected in rising profits across the industry. For example, aggregate earnings before interest, tax, depreciation and amortization (EBITDA) of 11 hoteliers listed on the Stock Exchange of Thailand (SET) climbed to Bt31.07 billion in 2018, from Bt20.61 billion in 2014, a compound annual growth rate (CAGR) of 10.8%. The average EBITDA margin of listed hoteliers was healthy as well. The yearly average EBITDA margin ranged from 24.4% to 26.4% during 2014 to 2018.

The slower growth rate in 2019 has led to slower growth rates in earnings and weaker margins. In the first quarter of 2019, EBITDA at many of the listed hoteliers fell, largely due to fewer tourist arrivals from China and European countries. Across the 11 listed hoteliers, aggregate EBITDA grew by only 3.1% y-o-y. The average EBITDA margin actually slipped, sliding to 20.6%.

Leverage ratios rise
During 2014 through 2018, leverage at most listed hoteliers climbed. A key measure of leverage, the weighted average of adjusted debt to EBITDA ratio, rose to 8.4 times in 2018 from 3.6 times in 2014. In the first quarter of 2019, the weighted average of this leverage ratio strengthened slightly, slipping to 7.1 times.
The leverage ratios of Minor International PLC (MINT) were above the industry average during 2014-2018. Adjusted debt to EBITDA jumped from around 4.1 times in 2014 to about 12 times in 2018 as MINT acquired NH Hotel Group (NH), a large hotelier in Europe. TRIS Rating expects MINT’s leverage ratio will stay around 6-7 times over the next one to two years. Afterward, we expect MINT to follow a deleveraging plan already in place.
The leverage ratio of Central Plaza Hotel PLC (CENTEL) were below the industry average. The adjusted debt to EBITDA of CENTEL ranged around 2.0-2.9 times during 2014-2018. We expect CENTEL’s financial leverage will slowly rise to 3.2 times in 2020 owing to the sizable investment in new hotels and renovation of existing hotels during 2018-2020.
Dusit Thani PLC (DTC) has long had a leverage ratio lower than the industry average. However, the leverage ratio of DTC began to rise in 2017. DTC is developing a large-scale mixed use property project. We expect revenues and EBITDA will drop during 2019-2021 since the Dusit Thani Bangkok, its former flagship hotel, is now closed. We forecast its ratio of adjusted debt to EBITDA to stay at 5-7 times during the next two years.
The leverage ratio of Grande Asset Hotel and Property PLC (GRAND) is higher than the industry average. The ratio rose to 9.4 times in the first quarter of 2019, up from 1.5 times in 2014. An aggressive investment plan and condominium sales that were slower than expected pushed up its financial leverage.
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