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

Hi, everyone. Welcome to 3Q 2024 Analyst Meeting of the Erawan Group Public Company Limited. Today, we have management joining Khun Youssef, our company President; Khun Apinya Ngamapichon, CFO; Khun Jetiya Kitiyodom, Head of Accounting; Khun [indiscernible], Head of Finance. With that, I will hand over this to Khun Youssef.

Thank you. Thank you, Khun [ Kai. ] Good morning, everyone, and thank you for joining today's session. So today's agenda, we're going to go through 4 sections. I'll start initially with a summary of overall market trend and company performance, and Khun Pi will cover more into detail on the industry and our numbers, and we will end with the overall outlook for the year. So basically, in terms of tourism market, so the third quarter, starting with Thailand, overall, the industry has seen a mixed trend where we had a very strong arrival in July and August, followed by a very soft month of September. So September has recorded the lowest tourist arrival of the year. That month, in particular, historically has been a low demand month for the destination due to seasonality. And this year, that seasonality was also coupled with other factors such as the strengthening of the Thai baht, which made the destination less competitive and also the flooding crisis that affected travel demand, especially from domestic market. So that was mostly in September. For the Philippines, so the tourism industry continued to see challenges in terms of international arrival growth, especially from China. So the local authorities have applied stricter visa requirement for Chinese nationals. So that kind of limit the ability to grow tourism numbers; however, there are good signs from other markets with new scheduled flights from Europe, Japan and South Korea. So if you look at Philippines in third quarter, domestic market was the top feeder market for hotels. For Japan, the tourism sector continued to experience substantial growth in international visitors. So the surge has been largely driven by significant influx of Chinese tourists as well as South Korean, Taiwan and other nearby Asian countries. For our company performance, in particular, so the third quarter, we recorded a 6% year-on-year growth in revenues and a 2% growth in EBITDA. So despite a soft month of September, we were able to grow overall Q3 RevPAR, thanks to a strong performance of economy and budget hotels. Mid-scale segment had a minimal year-on-year growth, and we look at a more detailed number later on, but Holiday Inn renovation was still going on this third quarter, while last year third quarter was fully operating with full inventory. So the renovation of Holiday Inn Pattaya has been completed by end of September, and the hotel had a positive ramp-up so far. So for the month of November, we're forecasting to close at 80%. So the property is now up and running full inventory. For the Luxury segment, for us, we continue to have -- for the third quarter, we continue to have an impact by the Grand Hyatt. As we mentioned in the last meeting that due to the incident, we had a softening of demand and a few cancellations, which impacted the third quarter. So overall, Grand Hyatt recovery was slower than what we expected. So the impact lasted until end of October. November occupancies for this month are back to normal. So currently, our month-to-date occupancy for Grand Hyatt is 87%, and we are expected to close the month around that range, 85% to 87% and the rate as well is at a good level. So the Grand Hyatt is already back above trend. In terms of outlook, so October has been a soft month as well. So if we look at the early of October, we -- the demand from Chinese market, especially on the Golden Week was below expectation. So that has impacted overall our forecast; however, November is trending very well. So the beginning of November, especially the first week, have seen a lot of city events and corporate demand. So the hotels were very busy. But we also see that continuing towards the remaining of the month of November with strong events, strong MICE and strong corporate overall. For December, we're also forecasting to be a very strong month. Currently, we're seeing a high pace of booking, especially towards the festive period. So overall, we're optimistic on the fourth quarter. October was a bit soft, but the remaining of the Q4 will be very strong, and we should record a growth year-on-year, of course. So that's on the summary, and I will hand it over to Khun Pi to go through the industry overview. Thank you.

For tourism industry overview, we'll go through 3 countries that our hotel is present right now: Thailand, Japan and Philippines. Starting with Thailand first. In quarter 3 2024, Thailand attracted 8.6 million tourists, and the growth is 21% year-on-year and the recovery rate is still 89% recovery compared to pre-pandemic level. This is supported by increased flight capacity and relaxation of visa policy. So for the top 5 countries for this quarter are China, Malaysia, India, South Korea and Japan. If we look at the change to the previous quarter, Japan become top 5 for this quarter, replacing Russia. Next is Philippines. Philippines welcomed 1.4 million tourists in this quarter. As mentioned earlier as well, by Khun Youssef, the growth is quite moderate compared to the other markets that we are operating. The growth is 5% year-on-year, and the recovery rate is 70% compared to the pre-pandemic level. For the top 5 countries, South Korea, U.S.A., Japan, China and Australia. So Japan has been moving up to the 3rd rank compared to the previous quarter. Due to moderate demand, our hotel, again, it's under HOP INN brand. So the 70% of the demand are local Philippines. So we are growing with -- and do not rely on international demand that much. For Japan tourism, tourist arrival was 9.1 million, growing 37% year-on-year, and the recovery would exceed pre-pandemic level already by 17%. So the top 5 countries are China, South Korea, Taiwan, U.S.A. and Hong Kong. And for this quarter, China become the top rank of tourist arrival replacing South Korea. Next is our company performance. In terms of Erawan top source market continues to be 5 countries: China, United States, Thailand, Singapore and India. So this top source market revenue growth is already surpassed pre-COVID level. The main growth driver are still China, which the mix has been increasing compared to last year and the past quarter. China is the main source market for economy segment and also the top source market for mid-scale and luxury segment. For United States, they are top source market in luxury and top 5 source market in mid-scale. For Thailand, the mix has been decreased a little bit from last year, and they are top source market in economy and top rank in budget segment. Now moving on to operating performance of the Erawan Group in this quarter. Our RevPAR, if you see the trend, it's dropped slightly from last year by 2%, driven by the softer occupancy rate. However, overall rate grew 3% year-on-year. So the reason that RevPAR slightly dropped from last year is because higher contribution of lower rate segment, which is budget and economy. While for this quarter, our luxury segment performance was relatively soft due to Hyatt incident. However, ADR for our segment continued to grow year-on-year. For Luxury to Economy segment, RevPAR grew 2% year-on-year. We see the strong rate growth of 5%, while the occupancy dropped 3% year-on-year. This is due to other performance of Luxury segment while Economy and Mid-scale continue to deliver RevPAR growth year-on-year. So this page will be the breakdown of performance by segment. Starting with Luxury first. Luxury, as mentioned earlier, performance in this quarter is relatively soft. RevPAR growth was -- RevPAR was 4% below last year because of the impact from Grand Hyatt incident. So if we exclude impact from the Grand Hyatt incident from the performance, RevPAR grew 7% year-on-year. Moving on to Mid-scale. The RevPAR continued to grow year-on-year at 1%. And this is -- the growth continued even though there is an impact from Holiday Inn renovation. Holiday Inn Pattaya renovation is already completed in September. So in October, we will have full inventory back. So for quarter 3 performance, if we exclude performance of Holiday Inn Pattaya from mid-scale segment, the RevPAR will grow 7% year-on-year. So you can see the light blue box that we have already exclude Holiday Inn performance. Next is Economy performance. Economy is a strong performer in this quarter. RevPAR grew double digit in this quarter to 14%, driven by strong growth in both occupancy and rate. So with this operating performance, it's translated into financial performance of Luxury to Economy segment. So our profitability in terms of EBITDA dropped 6% year-on-year. This is due to the softer -- the revenue, which is on par due to performance of Grand Hyatt and renovation of Holiday Inn. However, if we look at year-to-date performance, both revenue and EBITDA continue to grow year-on-year. Next is performance of Budget segment. Budget segment continue to be solid. RevPAR grew 13% year-on-year and the rate grew 21% year-on-year. This is due to higher contribution of performance of Japan, which opened this year with higher rate. So in this -- if we track back the pace of our expansion, we see a continuous expansion in each quarter. So this quarter, we opened 2 more hotels in budget segment with additional 231 rooms. In terms of performance of Budget segment by country, Thailand and Japan continue to perform strongly. For Thailand, RevPAR grew 5% year-on-year, even though there is some partial impact from rainy season and flood in North and Northeastern part of Thailand. The rate continued to grow 8% and while occupancy dropped slightly by 2%. For Philippines, RevPAR dropped 12% year-on-year, and this is mainly due to the impact of performance of new hotels, which is still in the ramping up phase. If we exclude the performance of new hotel that is opened in 2024, RevPAR slightly dropped from last year by 3%. Lastly is Japan. This quarter, occupancy is 68%, and the rate is around THB 2,900. The performance, if you look, in terms of quarter-on-quarter basis, performance is lower because in quarter 2, it was high season of Cherry Blossom. So in this quarter, we see the drop in number of customers mainly from Thailand market, and we will expect to see the higher performance in Q4. So in terms of financial performance of Budget segment, revenue continue to grow strongly by 35% year-on-year and EBITDA also grew 31% year-on-year, supported by revenue flow-through, but was partially offset by performance of the newly opened hotels. Year-to-date performance continue to be very strong. So for the performance of the group in this quarter, as mentioned earlier, revenue grew 6% year-on-year, while EBITDA grew 2% and NPAT dropped 19% year-on-year. This was due to softer revenue in this quarter from Grand Hyatt incident, renovation of Mid-scale segment and also impact in HOP INN Thailand from the flooding. And NPAT also impacted by higher depreciation and interest expense from accelerated expansion; however, our financial position continue to be strong. Our leverage ratio in this quarter is 1.5x, slightly dropped from the end of last year of 1.7x. This is driven by a strong equity base from increase in accumulated retained earnings, while our interest-bearing debt increased as well due to the -- to support the expansion. We have ample liquidity to support the expansion in the future, including THB 1.2 billion cash on hand and THB 6.1 billion credit facilities. So let me hand over to Khun Youssef to talk about the outlook of the company.

Thank you. In terms of outlook, for this year, we are targeting to close with an occupancy at 80%. So we remain with the initial guidance that we shared with you. In terms of total revenues, we are actually expecting Q4 to see a strong growth, especially from the 13 hotels that are opened this year from HOP INN in Thailand and Philippines as well as Japan. So Q4 is expected to have strong growth from a ramp-up of those properties as well as existing hotels that should do well in November as well as December with the festive season. In terms of key operating strategies, again, the story this year for us, and I guess, for overall market is about rates. So ADR will continue to be a focus for us through effective yield management. So that's a combination of price positioning, but also mix optimization and pushing more segments at a higher yield. F&B is also a focus, especially for our 5-star segments where the recovery was not there yet this year. If we look specifically at the MICE, there is a big part of MICE, which was contributed from China in terms of meeting and conferences, which this year hasn't been fully recovered. So we continue to put a lot of effort in terms of MICE. This Q4, we see a lot of events coming, a lot of meeting inquiries for November and December and also towards actually Q1 next year. And profitability remain always a focus for our operations to make sure that we enhance margins. In terms of industry forces, so basically, we're quite optimistic on how the trend is going to evolve in the next few months. China will continue to be one of the key market driver for the 3 countries where we operate. In terms of headwinds, geopolitical macro, it is still an area of uncertainty. But so far, we don't see any impact to tourism globally or in the region. The Thai baht, of course, as I mentioned earlier, was somehow a concern for tourism in September because if we look at the Thai appreciation versus some of the currencies in the region through Singapore dollar or other currencies, Thailand became more expensive, especially in the month of September. The baht kind of softened a bit afterwards, but it's something that eventually, if it's not softened further, might affect the destination from a competitive point of view. So that's on the guidance. As well in terms of pipeline, I just would like to update, this is the list that we've presented since the beginning of the year. So basically, we're on the time line on all the openings. So we've opened all these properties in Q4. The plan is 2 hotels, Prachuapkirikan, which opened in October -- mid-October already; and Prayao, which will open by mid-December. So we are -- we should be able to execute all the opening plan as per our initial plan. And lastly, I just would like to update on HOP INN as well. As we presented last meeting on the strategic plan for our Budget brand in terms of expansion from now until 2030. We've also [indiscernible] last month the private equity funding that we've secured. So basically, our company entered into a strategic partnership with Lapis Hospitality, which is managed by Lombard. So this partnership will allow us to gain insight from Lombard in terms of investment portfolio in the Asian Pacific region and also gain experience from them in terms of IPO because also we mentioned that as part of the plan is to spinoff HOP INN and to IPO filing expected to be by 2027. So the proceeds from this private equity is to support the long-term expansion plan of HOP INN, which we've already shared, and we're targeting to achieve 150 hotels by 2030 in APAC and also to allow HOP INN to have more autonomy in terms of self-financing and for Erawan to have more flexibility to finance new projects in the Economy to Luxury segments where we are now exploring new investments in those segments as well in Thailand. So this is the latest update on HOP INN. And yes, so we'll conclude there. So we ended our presentation.