Investment Highlights

• Longer runway for recovery of China’s outbound tourism. According to data from China Tourism Academy (CTA), a think tank under China National Tourism Authority (CNTA), 2023 saw a significant rebound in China’s tourism activities with the number of total inbound and outbound tourist exceeding 190mil (+>3.8x YoY). However, the recovery was skewed towards domestic tourism as the number of in-country trips returned to 80% of pre-pandemic 2019 levels whilst outbound tourism struggled after a 3-year hiatus and recovered to only 55% by 3Q2023, as presented by United Nations World Tourism Organisation (UNWTO). For 2024F, the institute expects total inbound and outbound tourist numbers to recover further to 260mil (+37% YoY), underpinned by a similar narrative as above-historical performance for domestic travel demand will be dragged by the slower pace of recovery for outbound tourism, which will reach 77% of pre-pandemic levels, rather than a robust catch-up. This implies a longer runway for the full recovery of outbound tourism, likely in 2025.

• All things considered, near-bound tourism is in play. Despite the less-than-ideal pace of recovery, we see a pocket of opportunity in near-bound tourism. Though the current narrative is in line with ongoing efforts by China’s government to pivot towards a domestically-driven economy, we believe the lag in outbound performance is not fully attributable to this factor as travelers do exhibit the desire for travelling abroad based on our observation. In this regard, we concur with the prevailing market view that supply side issues, particularly: (a) slower visa approvals; and (b) limited flight capacity, play a more prominent role.

• ‘Visa-free era’ to spur China’s near-bound rebound. The latest market sentiment survey on China’s outbound tourism destination markets undertook by World Tourism Alliance (WTA) and Horwath HTL, Southeast Asia shows a positive 20 points relative to other destinations . The survey notes the reintroduction of pilot outbound group travel in early 2023 and, more importantly, the announcement of mutual visa waiver agreements in 4Q2023 between China and selected countries - Malaysia, Thailand and Singapore. For reference, China’s passport is currently ranked 64th on the Henley Passport Index (out of 199). Though China has awarded visa-free policies without reciprocity for more countries, including key luxury tourism destinations e.g., France, Italy and Spain, we believe these regions will lag as preferred tourism destination by the general non-affluent traveler given relatively stronger foreign currency and higher associated costs. Following the 30-day visa free waiver announcement in November 2023, Trip.com reported that Malaysia-related searches increased by 96% WoW. Subsequently, Malaysia saw a +35% YoY increase in China tourist arrivals in December 2023. We gather that both governments are currently discussing extension of the waiver beyond November 2024, which appears likely as Malaysians made up the largest group of inbound tourism in China during the same period, according to China's National Immigration Administration (NIA).

• Continuous news flows on direct flights to China are signs of efforts to build supportive capacity. We see encouraging signs on capacity growth to China from the 3QFY23 results briefing with Malaysia Airports Holdings (MAHB), which saw filled seat capacity recovering up to 45% of pre-pandemic levels at 3.77mil pax and weekly flight frequency up to 64.7% at 238 flights per week . Moving forward, we gather from MAVCOM that China-related routes including KUL-HKG (Hong Kong International Airport) and KUL-PVG (Shanghai Pudong International Airport) may see the largest increases in capacity for 2024. In addition, we also note the following new routes: (a) Loongair’s KL-HGH (Hangzhou Xiaoshan International Airport); (b) China Eastern Airlines KCH / KUL-NKG (Nanjing Lukou International Airport); and (c) Air Asia X KUL-XIY (Xi'an Xianyang International Airport).

• Spring Festival holiday provides a boost to outbound travel. We believe the Spring Festival will provide the much- needed boost for China’s outbound travel for 2024. The holiday is one of 2 of the longest seasons for the China populace and will see an extra day this year. Though we have yet to see data releases on the matter, according to estimates by NIA, the daily average number of international passenger clearances is expected to reach 1.8mil people (+3.3x YoY) and roughly similar to pre-pandemic levels. This is supportive of outbound travel bookings data for Southeast Asia, Japan and South Korea, which collectively increased by more than 10x, as provided by Ctrip, a popular platform in China. For reference, Malaysia received about 1.4mil Chinese tourists, accounting for 7.8% of total tourist arrivals in 2023, according to Tourism Malaysia. The agency continues to see China as a key source market and aims to achieve a target of 5mil tourist for 2024F.

• Potential de-rating factors include: (1) slower-than-expected recovery in Malaysia’s air travel demand amidst looming concerns of a global economic slowdown; (2) worsening supply chain issues could impact capacity to undertake air travel, and (3) unfavourable travel restrictions in key regions, e.g., China.
• We maintain OVERWEIGHT on the sector. Our top pick is Malaysia Airports (BUY, FV: RM8.07/share), a direct proxy to Malaysia’s aviation industry, on expectation that the pace of recovery will continue within the aviation sector in 2024F, with foreign tourist arrivals beating pre-pandemic levels on the back of stronger government policy support, the ramping up of international air travel capacity and firm demand from niche subsectors such as medical tourism.We also like Perak Transit (BUY, FV: RM1.49/share) which offers a good opportunity for investors to own a defensive public infrastructural business while capitalising on resilient growth from steady improvement in occupancy rates and improving footfalls at Terminal Meru Raya and Kampar Putra Sentral coupled with maiden earnings contribution from terminal Bidor Sentral, which is expected to kick in from 1HFY24 onwards. Moreover, within the sustainability space, Perak Transit is gradually making headways with carbon reduction efforts by increasing the adoption of solar energy as well as transitioning its current fleet of diesel-fueled buses to electric models over the coming years.

Source: AmInvest Research - 14 Feb 2024