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Erawan Group (ERW TB) Summary

Core Information

• Share Price: THB3.70
• Target Price: THB4.50 (+22% from current price)
• Market Cap (USD): 284M
• Average Daily Trading Volume (USD): 1M
• Country: Thailand
• Sector: Hotels
• Investment Recommendation: BUY (unchanged)

Key Highlights

• Operational Recovery: The company reported operational improvements from 2Q14 onward, with the occupancy rate expected to increase to 70% in 2Q14 and 75%-80% in 2H14.
• Revenue Recovery: The occupancy rate is expected to return to normal levels in 2H14, driven by the easing of political unrest and the lifting of travel warnings.
• Hotel Expansion: ERW plans to open 8 new hotels (HOP Inn, Mercure Pattaya, and ibis Krabi) in 2H14 and extend its Holiday Inn, leading to a 36% increase in the number of rooms by the end of 2014.
• Profitability Outlook: The company's core net profit is expected to improve significantly in 2H14 and 2015, supported by recovery in tourism and the growth of the HOP Inn chain.
• Discount to Replacement Value: ERW's share price is currently trading at a 35% discount to its replacement value.

Key Financial Metrics

Key Takeaways from Analyst Meeting

• Operational Improvement: The company showed improvement in occupancy and operations after 1Q14, indicating a positive recovery trend.
• Political Impact: The slowdown in tourism traffic was primarily due to the ongoing political conflict and travel warnings.
• Occupancy Recovery: The occupancy rate is expected to rebound to 70% in 2Q14 and 80% in 4Q14 if there is no further political violence.
• HOP Inn Performance: The HOP Inn chain is expected to perform well due to its budget-friendly model and potential to attract both international and domestic tourists.

Revenue and Profit Trends

• 1Q14 Performance: Revenue declined by 21% QoQ and 24% YoY to THB953m due to the impact of political unrest.
• Core Net Profit: Core net profit fell to THB52.9m in 1Q14, compared to THB67.9m in 1Q13.
• EBITDA Margin: The EBITDA margin contracted to 24% in 1Q14, compared to 27% in 4Q13 and 34% in 1Q13.
• Profitability Recovery: The company is expected to see a significant improvement in profitability in 2H14 and 2015, with core net profit forecasted at THB332.3m and THB518.3m for FY14E and FY15E respectively.

Occupancy and RevPAR Trends

• Occupancy Rate: The occupancy rate in 1Q14 was 65%, down from 85% in 1Q13 and 78%-80% on historical average.
• RevPAR: RevPAR dropped by 15% QoQ and 22% YoY in 1Q14.
• 2Q14 Outlook: Occupancy is expected to rebound to 70% in 2Q14, with RevPAR projected to fall 6% YoY.
• Seasonal Weakness: The second quarter is typically weak due to the rainy season and travel warnings, but recovery is expected in 3Q14 and 4Q14.

Hotel Expansion Plan

• Capacity Expansion: ERW plans to invest THB2.6b to open 11 hotels in 2H14, increasing the number of rooms by 36% by the end of 2014.
• HOP Inn Growth: The HOP Inn chain will expand to 25 hotels by the end of 2015.
• Reasons for Success: The HOP Inn is expected to succeed due to urbanisation, low cost airline expansion, attractive pricing, and low competition in second-tier markets.

Key Risks and Outlook

• Near-term Challenges: The company faces near-term challenges due to the political conflict and seasonal weakness.
• Medium-term Outlook: The medium-term outlook is positive, with the expectation of recovery in tourism and improved profitability.
• Dividend Yield: The net dividend yield is expected to increase from 0.5% in FY12A to 1.7% in FY16E.

Analyst Contact

• Sittichai Duangrattanachaya
  Email: sittichai.d@maybank-ke.co.th
  Phone: (66) 2658 6300 ext 1393

Research Offices

• Thailand: Sittichai Duangrattanachaya (Institutional Research), Sukit Udomsirikul (Retail Research), Jesada Techahusdin (Consumer / Materials), Kittisorn Pruithipat (Financial Services), Maria Lapi (Institutional Research), etc.
• Malaysia: Wong Chew Hann (Research Head), Desmond Ch'ng (Banking & Finance), etc.
• Singapore: Ng Wee Siang (Head of Research), Gregory Yap (SMID Caps), Wilson Liew (Property Developers), etc.
• Indonesia: Wilianto IE (Head of Research), Rahmi Marina (Banking & Finance), etc.
• Philippines: Luz Lorenzo (Head of Research), Laura Dy-Liacco (Utilities - Conglomerates - Telcos), etc.
• India: Jigar Shah (Head of Research), Anubhav Gupta (Oil & Gas - Automobile - Cement), etc.
• Hong Kong / China: Howard Wong (Head of Research), Jacqueline Ko (Oil & Gas - Regional), Karen Kwan (Consumer), etc.

Conclusion

Erawan Group is expected to recover from the near-term challenges posed by political unrest and seasonal weakness in 2014, with a strong outlook for profitability and occupancy improvement in the second half of the year. The expansion of the HOP Inn chain and the opening of new hotels are key drivers of this recovery. Despite the current discount to replacement value, the company's fundamentals are improving, supporting the BUY recommendation.