The Erawan Group Public Company Limited (ERW) Earnings Call Transcript & Summary

Hi, everyone. Welcome to 2Q 2024 Analyst Meeting of the Erawan Group Public Company Limited. Thank you for joining us. Today, we have management, Khun Youssef El Khomri, President; Khun Apinya Ngamapichon, CFO; Khun Jetiya Kitiyodom, Head of Accounting; [ Khun Angkhana Soponwit ], Head of Finance. I will hand over this presentation to Khun Youssef. Thank you.

Thank you. Thank you for coming this afternoon and for joining the session. Today in the agenda we have, starting with a brief summary just to give you an overview of the industry and our company performance as well as an outlook. Then we will move to the company performance by country. And then we will be sharing with you the guidance for the remaining of the year. And then finally, we'll have an update on our expansion plan for HOP INN. So the markets across the 3 countries where we operate have been very healthy. So the trend continues to be very strong. And we still record growth year-on-year across Thailand, Japan and the Philippines. For the tourism arrival, if we look at it from an Asia Pacific region, the numbers are closing the gap with 2019 in terms of arrivals. So the trend is very positive, and we believe that the targets -- the tourism target for the 3 countries where we operate can be achieved this year. The improvement of tourism is also linked to the fact that the flight capacity is recovering and is improving. We see more scheduled commercial flights throughout those destinations. So in general, the market is very healthy, and that will support our business for the remaining of the year and forward. For Thailand specifically, the second quarter have seen a strong uptick in Chinese travelers as well as Indian. So China, Q1 was very strong. Q2, we saw the numbers also improving, and we expect those numbers to continue growing for the remaining of the year. India has been also lagging last year. This year, we see very good signs from the Indian market. Also the flight capacity from different cities of India have increased. So we see an increased number of Indian tourists to Thailand. Japan have seen record numbers as the destination continues to see a surge of international travelers, mostly from East Asia. So we see China, South Korea growing quite fast into Japan. So the market is very healthy over there. And the Philippines is still lagging in terms of recovery comparing to the other 2 countries. However, the domestic market is very strong and very stable. And for our properties, we have a strong base of domestic, which is supporting our business. In terms of our company performance, so we have achieved the highest Q2 results in our record. So we continue to deliver good results Q-on-Q and year-on-year. Our revenue growth continued to be driven by an increase of tourist arrivals, coupled with our rate strategy. As we've mentioned to you in the previous meetings, the rate strategy is the key focus at the moment for us. From a volume standpoint, we don't see an increase of occupancy because we're happy with where we are, so we're trending in that 80% mark. So our aim is to continue growing rate, and we're quite successful so far in achieving that. So I just want to also highlight in terms of rate strategy what we mean by that. So there's various factors in terms of pricing. The first one is about just price positioning. So we're pricing our hotels higher, but we also actively yield the rates on busy days. And there is another component, which we call mix optimization. So basically, we give priority to higher-rated segments. So it's an improvement of the mix of our business within the properties that help us to elevate pricing. So if we look at our performance in Q2, our rate strategy was allowed us to achieve 7% growth in ADR and respectively as well, 7% growth in RevPAR year-on-year. So see good results in that front. In terms of market outlook, we remain very confident on the second half of this year. So as I mentioned earlier, the tourism arrival trend is very strong and that will continue to support our business. And when we look at our forward bookings for the remaining of the year is also showing very good demand trend, very healthy. So we are expecting to achieve our targets for the year. So that's on the summary, and I will pass it to Khun Apinya to give more detail in terms of industry overview and company performance.

For the 3 markets that we are operating, we'll go through tourism in each market, Thailand, Philippines and Japan. Starting with Thailand first, in quarter 2, tourist arrival in Thailand is 8.1 million, growing 26% year-on-year and recovered 91% compared to pre-COVID level. In this quarter, we see strong performance of tourist arrival even though this is low season, supported by free-visa scheme the government and also increase in flight capacity, as mentioned earlier. If we look at the mix of nationalities coming to Thailand, China, Malaysia, India, South Korea and Brazil are the top 5. And if we compare to previous quarter, we see the increase in the mix of Chinese to 21% from 19% from the previous quarter and India, which was on the fifth rank in the last quarter, the rank become the third now and the mix is 7% compared to 5% in the previous quarter. This is supported by expansion of visa exemption from May to November this year. Next is Philippines. As mentioned earlier that the growth is relatively modest compared to the other market that we are operating. Number of tourist arrival is 1.4 million, increasing 5% year-on-year and recovered 71% compared to pre-COVID level. And the top 5 are South Korea, U.S.A., China, Japan and Australia. Even though the growth is quite modest, our brand is HOP INN, which is over 60% is local Philippines. So it's not purely reliant on international market. And the last market is Japan. This quarter, Japan tourism is very strong. Number of tourist arrival is 9.1 million, growing 56% year-on-year and already surpassed pre-COVID level by 7%. The top 5 are South Korea, China, Taiwan, U.S.A. and Hong Kong. Moving on to company performance on the top 5 source market of the Erawan Group. The top 5 are still the same compared to the previous quarter on nationalities, China, U.S.A., Thailand, Singapore and India. And if we look at the recovery rate compared to pre-COVID level, every market the growth is higher than pre-COVID matched with pre-COVID level. Especially China sees strong growth. They are the top 1 in mid-scale segment and also in the top 5 of Luxury and Economy segment. For United States, they are the top 1 in Luxury segment. And for Thailand, we see a drop in last -- compared to last year. This is due to the renovation of Holiday Inn Pattaya, which the customer base -- I mean, the Thai, and also in the last year, we have [indiscernible] scheme, which is in effect in April 2023, which drive local demand. As mentioned, our strategy to drive the rate was successfully implemented in quarter 2, we see average rate growth of 7%. As a result, our RevPAR grew 7% year-on-year, while occupancy rate was up 79% and slightly dropped by 1% compared to last year. This slide will show performance by geography, starting from Thailand first. For Thailand, the rate growth is strong in every segment. The average rate of growth is 6%, and RevPAR growth is 5%. If you look at the rate in each segment in Thailand, it showed a strong growth. And as a result, RevPAR of every segment except Midscale grew from last year, especially Luxury and Economy, which delivered double-digit growth compared to last year. For Midscale, we see a drop in occupancy. This is due to Holiday Inn renovation. As a result, RevPAR dropped 2% from last year. If we exclude impact of Holiday Inn from Midscale calculation, the RevPAR will grow 7% year-on-year. And moving on to the Philippines market. We still see a strong performance in Philippines. Occupancy rate grew 3% last year. The rate also grew 3% from last year. As a result, RevPAR growth 7% from last year. For Japan, we have strong performance in Japan compared to the prior quarter that we have ramp-up phase. Occupancy rate in this quarter is 73%, improving significantly from the last quarter with occupancy rate of 48%. This is driven by high season of cherry blossoms that support the number of tourists in Japan. Due to strong RevPAR growth, our revenue in quarter 2 is THB 1,844 million, growing up 12% year-on-year. And it fall through to the EBITDA level. EBITDA level is THB 564 million (sic) [ THB 546 million ], growing 13% year-on-year. Our EBITDA margin also improved from the last year. And our normalized net profit, excluding extra item is 127%, growing 5% year-on-year. The growth is less than the growth of revenue and EBITDA due to -- mainly to higher interest expense to support accelerated expansion. Next is our financial position. Our position remains strong. In this quarter, our interest-bearing debt to equity ratio dropped to 1.5x compared to 1.7x at the end of last year. This is due to increase of our equity base, which is mainly from strong net profit as well as capital increase from the exercise of warrant, which gives the proceed to the company of around THB 1.1 billion. In addition to that, we also have ample room of cash and available credit facilities to support growth in the future. Cash on hand is THB 1.6 billion, and available credit facility is THB 6 billion. Now let me hand over to Khun Youssef to talk about the outlook of the company.

In terms of outlook and our guidance for this year. So we are expecting to achieve 80% occupancy full year. In terms of rate and RevPAR, we're seeing a growth of 5% this year year-on-year and then total revenue between 14% and 15%. If we look at what we presented last month, we've put down slight auto revenue from 15% to 14%-15%. And one of the reason is the Grand Hyatt we've received a number of emails from you and asking about the impact of the incident. And I just would like to touch on that a little bit to give you an insight on how that implication of it. So during the incident, our occupancy declined to around 50% during the days of the incident. But the July month, we closed a 65% occupancy for the property. Usually, we're at 80%. So July was impacted by around 15 points of occupancy for this property. August, which is also mostly impacted because we had quite a number of cancellations. So also we'll be close around 65%. That's our forecast for this month. And in September, over 70%. So overall, this incident for Grand Hyatt will have an impact on Q3. The hotel will be back on track in October. If we look at the pickup pace, October is already back to normal trend. So we will be back to our occupancy levels by Q4. Now even though we have this impact to the property, the impact to consolidate for Q3 is around 0.5% occupancy. Okay, so it's a limited impact relative to the Grand Hyatt. So that's where we decided to adjust slightly the guidance. So if we look at the full year the impact of Grand Hyatt on the full year will be 0.2%, 0.1% in terms of occupancy. And again, this number will change as -- if we look at just the last few days, the last weekend also was full, yesterday we're at 88% occupancy. So the trend is coming back quite fast. So the number that I shared with you are a bit conservative, and we're hopefully going to see the month of August closing better in terms of volumes. And in September also, we are expecting to perform at better than what we forecasted at 70%. So all in all, we don't see any major impact to our company from the incident. Total revenue, 14%-15%. Our key focus will continue to be on rate. And as I mentioned earlier, this is the strategy that we will pursue for the foreseeable future. F&B also will be a focus. As you know, that food and beverage in the last few quarters, we shared with you that the performance hasn't been as we wanted in terms of events. So our focus will continue to be on the event space to maximize the occupancy for our meeting rooms and bringing back conferences to -- especially to our 5-star hotel. And then also to share from an F&B performance, in terms of outlets, we're quite at a good level at the moment. So we're seeing a good trend in terms of core accounts across all the outlooks for the Grand Hyatt and the JW. So we're putting a lot of focus on the commercial side of it to focus on the domestic market to maximize our F&B business. And of course, profitability and cost leadership is also where we put a lot of time on to enhance our margins. We've shown in the last few quarters that we are able to grow margin, and we will continue to put the efforts in that area. Some of the positives. Again, as I mentioned before, China is very strong, and we expect that to continue contributing to the growth for the remaining of the year. India as well is one of the market that we continue to see an increased number of arrivals. The visa policies that the government have issued was quite good for the market and for our industry. So we've seen good feedback and also good numbers from some new markets that have now been vise-free, that, that increased the number of arrivals. So that help facilitating the -- for us to reach the tourist target for the year. Some of the, I would say, the possible risks, again, from an international point of view, there is a lot of crisis in the Middle East, in Russia, -- so all these events that could somehow at a certain point affect global travel. But at the moment, we don't see any impact, but we are watching carefully to see how that would eventually affect the business. If let's say, the war in the Middle East escalate or in Russia as well escalate, that will have an effect on global travel. But so far, we don't see any impact. Slower economic growth. So this is an area that, of course, across the globe is a concern. But to travel, we don't see as well an impact. And lastly, to end this part is, of course, the political uncertainty in Thailand. It is ongoing at the moment, and we hope that, that will not have an impact as well on our business. But again, for us, we focus on improving the business in the hotel. And so far, the trend is very positive. So as we -- as I mentioned earlier, the guidance here is -- we're quite confident that we'll be able to achieve by the end of this year. Today, we added 1 section to give you an update on the hoping growth plan. So in the past with you -- in previous meetings we've shared with you the -- some of the strategic direction for HOP INN and that we are planning to scale the brand in Asia Pacific as the growth engine for the Erawan Group. So HOP INN have achieved great success in all the markets where we operate in part of branding, reputation, quality of products and services also in terms of financial performance. So that gives us confidence that we are on the right direction, the right track to keep growing and building on that to target our plan by 2030 to achieve 150 hotels across the Asia Pacific region. So for Thailand, our plan is to reach 105 hotels. So Thailand will remain our main market for HOP INN. We still see a lot of opportunities even though our portfolio today is quite large. We see a lot more options for us to grow the brand in many of the provinces. Philippines, we had already quite a strong presence, and we are continuing to expand, and we are aiming to achieved 14 hotels in the Philippines. And in Japan, with the acquisition of 4 properties early this year, we are aiming for 15 hotels on the long term. And these countries here that you can see from the map, it is currently on study phase and eventually, we'll be able to expand as well to those countries. As we scale HOP INN and the contribution increases to the Erawan, I just would like to highlight that the benefits is not only from the revenue growth and diversification, but it brings stability to the overall Erawan portfolio. If you look at the chart here, this is our RevPAR recovery by segment for the company. The dark line here is the Erawan Group overall. The green dotted line is Economy-to-Luxury segment. And then the 2 blue lines here, the dark one and then the light one, is the HOP INN Thailand and then HOP INN Philippines. So this is the RevPAR pre-COVID and post-COVID recovery. What I would like to highlight here is that HOP INN being predominantly local driven, domestic market driven, it is much more resilient. If you look at the -- during the pandemic, the drops were less severe. The recovery was much faster. So HOP INN is bringing a lot of stability to our business. So this gives us also more confidence that growing the budget segment and continuing to focus on the domestic markets in the countries where we operate is the right strategy. The HOP INN, if you look at Thailand, 90% plus is domestic. Philippines is 60% plus domestic. Japan, we're trending very well now and the domestic market is growing. So our reliance on international travel is very minimal for HOP INN, in contrary to the Economy and Luxury segment. So what I would like to share today is that HOP INN, as we continue to scale, will bring us more stability, especially in our Q2 and Q3. If we look historically for our company, Q2 and Q3 was a bit of a struggle. We had strong seasonality because of our hotels are mostly focusing on international travel. So as HOP INN is scaling, that seasonality will be reducing, and we have less volatility in our business. If you look at our occupancy, even last year and this year, Q1, Q2, Q3, it's more stable, right? So we are at 80% -- 79% occupancy. So we're in a good trend overall. So this is one of the reasons where we feel that from a strategic point of view, HOP INN is a good plan to continue expanding for overall portfolio. I would like also to touch on Japan. So Japan, as Khun Apinya mentioned earlier, has performed very well. The first quarter this year, we were at 48% occupancy. The second quarter, we actually have 73% occupancy. So the ramp-up was faster than what we expected, and we're performing overall very well across the 4 properties. I would say that we were quite successful in entering the new market and positioning ourselves with the locals. It was not an easy task because there is a lot of local brands. So coming in as an international brand to Japan, that was a challenge, but we were able to penetrate the market and position ourselves at the right position. And if we look at the hotels that we opened, we were able to achieve a positive EBITDA after 2, 3 months. So the ramp-up is very fast. And on a net profit, we were profitable in the second quarter. So second quarter, of course, was supported by the sakura seasons. So it was a high season for Japan, but it was a very good strong milestone for us to be able to turn positive NPAT in the second quarter. If we look at it on a full year, we may still be slightly negative. Will depend how the Q3 and Q4 will trend. But very -- we're getting very closer to the breakeven point. So the trend is very positive so far for us in Japan. Now In terms of our long-term plan and contribution of luxury and economy segment and HOP INN. So you can see the dark blue is the luxury in economy. The light blue is HOP INN. By 2019, we were -- HOP INN was contributing 12% to revenue and 15% to EBITDA. Today, we are at 26% revenue and 24% EBITDA. So we start to get to a good level of contribution. And we are heading towards our goal to achieve close to 40% EBITDA contribution for our budget brand to total Erawan portfolio. And just also to note that as we are scaling and we are accelerating the development pace of HOP INN, we are also working on new development projects for other segments. So as we mentioned in the previous meeting that we are mostly looking at Thailand, to develop new hotels in the Economy scale segment as well as we still see opportunities for the Thai market to grow more inventory for our group. And then just to end an update on the this year pipeline. So we are adding 14 new hotels to the portfolio, all under HOP INN brand. This is across the 3 countries. So we've opened in the second quarter 4 properties, which are Siracha -- in Thailand, Siracha and Ratchaburi. And then we opened in the Philippines 2 properties, which are North EDSA in Manila and Iloilo. Iloilo is a new province that we are entering in the Philippines. In this quarter, we are opening 2 hotels in Thailand, Nakon phanom and Prachuapkirikan, and in Davao in the Philippines. And then on the fourth quarter, we have 2 properties in Thailand, which are Songkha and Prayao. So we're on track with our plan and with our time line for these 14 new properties to our portfolio. And that's all for us today.