6th March 2017, South Korea - We assess the impact of China travel curbs to South Korea. Background: The China National Tourism Administration (CNTA) has issued a travel advisory on 3rd March 2017 advising its residents to exercise caution when choosing their international travel destination following the rise in the number of incidents of Chinese residents being denied entry in Jeju island (source: Financial Times, 3rd March 2017). In addition, Korea Joongang Daily reported on 4th March 2017 that the Chinese government has instructed the travel agencies to stop selling tour packages to South Korea starting from 15th March 2017 in the latest retaliation against the deployment of the United States’ Terminal High Altitude Area Defense (THAAD) system in South Korea. Chinese travelers can still visit Korea if they do direct ticket bookings and free-and-easy trips.
+ Air travel demand has already decelerated and is likely to decline on China-Korea routes near term due to the impact of China travel curbs to South Korea. The growth of Chinese outbound traffic to South Korea, which is one of the most popular travel destinations for Chinese outbound tourists, had already started slowing since 4Q16. The number of Chinese outbound tourists to South Korea grew only 7% y/y in 4Q16, a sharp deceleration from its 45% growth y/y in 9M16.
This follows the Chinese government’s advisory to travel agencies back in October 2016 to reduce the number of group tours to Korea by more than 20% from November 2016 to April 2017 (source: Bloomberg). This could in turn negatively impact outbound Korean traffic to China.
In 2016, 4 million of the 8.1 million Chinese who visited South Korea were on tour packages. There could therefore be as much as a 4 million drop in Chinese visitor arrivals to South Korea on an annual basis. We estimate that the Chinese and Korean airlines will need to cut their seat capacity on China-Korea routes by as much as 33% in order to maintain existing passenger load factors.
However, in reality, the decline in traffic is likely to be less than 4 million as some Chinese visitors would still try to circumvent the China travel curbs on travel to South Korea, most likely by opting for free-and-easy travel to South Korea. Furthermore, the share of package tours has been declining in recent years.
Chart: China outbound tourists to South Korea (4Q14 to 4Q16)
+ Drawing from Taiwan’s experience
Chinese outbound traffic to Taiwan has been weakening since 2Q16 following Taiwan’s Presidential Elections and the Chinese government’s decision to cut the travel quota for tour groups to Taiwan (source: The Straits Times).
The number of Chinese outbound tourists to Taiwan fell 40% y/y in 4Q16 and 16% y/y in the full year 2016. China Airlines Taiwan (CAL) and EVA Airways’ share prices have corrected 23% and 18% in 2016, partly due to this impact. Taiwan-China routes used to drive around 15% of CAL and EVA’s passenger revenue prior to the decline in traffic on Taiwan-China routes. The Taiwanese and Chinese carriers had collectively cut capacity on Taiwan-China routes by 14% y/y in 4Q16.
Chart: China outbound tourists to Taiwan (4Q14 to 4Q16)
Chart: Taiwan Airlines Share Price Performance (4Q14 to 4Q16)
Implications on stocks
+ KEY LOSERS FROM CHINA TRAVEL CURBS TO SOUTH KOREA – THE SOUTH KOREAN AIRLINES
The Korean aviation sector, which has a meaningful exposure to Chinese inbound traffic, could correct further in the near term due to China travel curbs to South Korea.
Among the 3 listed South Korean carriers, Asiana (0.9x P/B) has the largest exposure to China. Korea-China routes drive 22% of Asiana’s passenger revenue. This is followed by Korean Air (1.0x P/B) whose Korea-China routes drive 15% of its passenger revenue. Jeju Air (2.1x P/B) is expected to be relatively less affected as Korea-China routes account for only 2% of its passenger capacity.
The Chinese airlines’ capacity exposure to China-Korea routes is relatively smaller compared to Asiana and Korean Air. Nevertheless, we expect them to be negatively impacted by the China travel curbs to South Korea as the China-Korea routes are high-yielding ones for the Chinese airlines. Among the listed carriers, Spring Airlines (3.2x P/B) has the largest exposure to China-Korea routes which account for 3% of its total passenger capacity, followed by China Eastern Airlines (1.0x P/B) at 2% and China Southern Airlines (0.9x P/B) at 1%.
However, note that in the event of a sharp drop in travel bookings, the Korean and Chinese airlines have the flexibility to cut their capacity to China and South Korea respectively in the coming months and re-deploy that capacity on other routes to mitigate the negative earnings impact from the China travel curbs to South Korea
+ KEY WINNERS FROM THE CHINA TRAVEL CURBS TO SOUTH KOREA– ASEAN AIRLINES, AIRPORTS & SERVICE PROVIDERS
We expect the Chinese outbound tourists to bypass South Korea and travel to other destinations in Asia near term following the China travel curbs to South Korea. The chart below shows the top 10 destinations for China outbound tourists.
Chart: Top 10 destinations for China outbound tourists (from travel agencies) in 2015
Thailand, Singapore, Malaysia and Vietnam are among the top 10 most popular travel destinations for the Chinese outbound tourists and could benefit from China’s informal travel advisory on South Korea. (We will discuss whether Japan is a beneficiary of China’s travel curbs to South Korea in a separate report.)
In fact, the growth in Chinese outbound traffic to these markets has been very strong in the past year. Chinese outbound tourists to Malaysia, Singapore and Thailand grew 50%, 36% and 11% y/y respectively in 2016. Note that Thailand saw a sharp drop (-21% y/y) in Chinese tourist numbers in 4Q16, mainly due to the government’s crackdown of “zero-dollar” tour package scams (source: Bangkok Post).
Chart: China outbound tourists to Malaysia (4Q14 to 4Q16)
Chart: China outbound tourists to Singapore (4Q14 to 4Q16)
Chart: China outbound tourists to Thailand (4Q14 to 4Q16)
+ Key listed aviation beneficiaries in ASEAN if Chinese outbound traffic diverts from South Korea to ASEAN
We expect the ASEAN aviation industry to be the key beneficiaries if more Chinese outbound traffic is diverted from Korea to the ASEAN region.
Assuming that as much as 4 million Chinese visitors are diverted to Singapore, Malaysia and Thailand from South Korea on an annual basis, this could boost the number of Chinese inbound visitors to these 3 countries by as much as 30% on an annual basis.
However, in reality, the drop-off in traffic is likely to be less than 4 million as some Chinese visitors would still try to circumvent this curb by opting for free-and-easy travel to South Korea.
Key listed beneficiaries
AirAsia Berhad (1.0x P/B): Malaysia-China accounts for 10% of AirAsia Berhad’s total passenger capacity.
Malaysia Airports (53x P/E): Flights from China account for the third largest share (around 4%) of MAHB’s international aircraft movements.
SATS (22x P/E): Flights from China are the third largest contributor at Singapore Changi Airport and account for 11% of total passenger aircraft movements.
Singapore Airlines (0.9x P/B): Singapore-China accounts for 11% of SIA Group (SIA, SilkAir, Scoot and Tigerair)’s total passenger capacity.
Airports of Thailand (25x P/E): Flights from China account for the largest share (26%) of AOT’s international aircraft movements.
Asia Aviation (1.2x P/B): Thailand-China accounts for 16% of Thai AirAsia’s total passenger capacity.
Note: All the P/B and P/E valuations stated above are based on current share prices and the average consensus estimates in calendar year 2017.
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