Returning Bigger, Stronger, and Better

• Set to exceed pre-COVID-19 levels in 2025
• Higher quality tourist profiles, international tourists exhibit significantly higher average spending and preference for experience themed travel
• A thriving tourism sector will boost disposable income levels of Malaysians, driving broader consumer spending across the economy
• Retail sector is our main actionable idea, followed by healthcare

Tourism, the 'below the radar' engine of economic prosperity. Tourism contributes 8.6% to Malaysia's GDP in 2023 and directly supports around 20% of the workforce. It is also a reliable source of foreign exchange for the country thanks to rising tourist receipts. A thriving tourism sector boosts disposable incomes for many Malaysians, as salaries are often linked to commissions and performance-based pay, while also benefiting other parts of the economy. The industry's economic multiplier effect is estimated at 3x, and is a clear outsized component of Malaysia's economy.

Have yet to recover fully from COVID-19, but gaining momentum. The sector is still recovering from pre-Covid levels, where it accounted for 12.5% of 2019's GDP. However, it has gained strong momentum since the second half of 2024, driven by solid tourist arrivals from China, India, and Indonesia. What is even more impressive is the quality of these tourists, as evidenced by their increased spending on high-end retail, luxury hotels, F&B, and experience-based holidays. We are now seeing more tourists with shopping bags than those just following a guide with a flag.

2025 looking very promising. Malaysia's popularity is rising in the region, with geopolitical tensions driving tourists to our shores, attracted by our neutral stance and non-allied policy. Furthermore, the MYR FX makes it a comparatively affordable destination. 2025 is also Visit Malaysia Year, and Malaysia is the ASEAN Chairman, promising a year packed with events and programs that will further boost tourism. The Ministry of Tourism targets 35.6mn tourists and MYR147bn in receipts, which represent increases of 36% and 70%, respectively, compared to 2019's figures.

Beneficiaries and Actionable Ideas. Al-Salam REIT (BUY, TP:RM046) is our top pick, as its Johor outlets has direct exposure to Singaporeans. The retail sector should benefit from direct consumption from tourists and we recommend BUY on AEON (BUY, TP: RM1.75), QL Resources (HOLD, TP: RM4.47), and Spritzer (BUY, TP: RM3.30). Finally, the healthcare sector is seeing buoyant medical tourism demand and we have BUY call for IHH (BUY, TP:RM8.60), but we are NEUTRAL on KPJ (HOLD, TP:RM2.52) on balanced valuation.

Other beneficiaries that are outside our scope of coverage are the transport sector, with Malaysia Airports Holdings (MAHB MK), CAPITALA MK, AirAsia X (AAX MK), and Grab (GRAB US). Shopping malls that are regularly patronised by tourists such as Pavilion REIT (PREIT MK), KLCC Stapled (KLCCS MK), YTL REIT (YTLREIT MK), and IGB (IGB MK). Alpha IVF (ALPHA MK) is seeing more foreigners seeking for its in vitro fertilisation services. Finally, the gaming sector (GENM MK, GENTING MK) will likely see more foreigners patronising its outlets.

Tourism is an Important Contributor to the Economy

The tourism sector, encompassing both international and domestic sources, generated MYR156bn in revenues in 2023, accounting for 8.6% of Malaysia's economy. The sector remains below its pre-COVID-19 peak of MYR189bn in 2019, when it made up 12.5% of GDP. Over the long term, the sector has delivered a CAGR of 5.4% from 2008 to 2023. However, excluding the pandemic years and measuring growth through 2019, the CAGR rises significantly to 9.4%, highlighting the sector's robust pre-COVID trajectory.

About 90% of the total number of tourists are for domestic travel. Domestic travel is growing at 15-year CAGR of 9.5% versus only 3.1% for international tourists. If you have ever wondered why tourist hotspots feel overcrowded during holidays, this statistic provides the answer.

Domestic tourism accounts for the lion's share of total tourism spending at 55% and has been growing at an impressive CAGR of 9.7% (2008-23). By comparison, international tourism has grown at a more measured CAGR of 5.4% over the same period, underscoring the strength of domestic demand as a key driver for the sector.

Approximately 3.4mn Malaysians work in the tourism and hospitality sector, accounting for roughly 20% of the nation's workforce. As a labour-intensive industry, it plays a pivotal role in driving economic activity and creating widespread opportunities across the country. The sector's growth has a direct impact on incomes, as many roles are productivity-linked through commissions and performance-based pay. A thriving tourism industry, therefore, not only boosts employment but also translates into rising wages for its workforce.

Malaysia's Tourists Profile

Domestic and international tourists are both driven by similar motivations but with markedly different dynamics. Charts 5 and 6 shows the key difference in terms of the behaviour between foreign and local tourist. Foreign tourist typically spends 2.2x higher and the average length of trip 2-3x longer. This is understandable as many domestic tourists are weekend trippers and make use of their private vehicle.

Most Tourist Hail from ASEAN Countries, with China & India Delivering the Biggest Growth

Malaysia's top visitors come from its neighbouring countries, with Singapore, Indonesia, Thailand, and Brunei leading the pack. However, the real growth story lies with Chinese and Indian tourists, whose arrival numbers in 2024 have surpassed pre-COVID levels from 2019. Key drivers include visa-free travel initiatives and expanded flight connectivity, which have significantly boosted demand.

Geopolitical shifts have also played to Malaysia's advantage. Chinese tourists, steering clear of South Korea and Japan, are seeking alternative destinations, while Indian travellers, frustrated by hurdles in visiting the UAE and Bangladesh, find Malaysia an appealing and hassle-free option. In both cases, Malaysia has emerged as the clear beneficiary, perfectly positioned to capitalize on these shifting trends.

Indonesian tourists, particularly urbanites from Jakarta, are increasingly favouring Malaysia as a hassle-free, safe, and cost-effective travel destination. The rising cost of living in Jakarta-due to customs duties, VAT, and income taxes on imported goods-has made a trip to Kuala Lumpur a deep value proposition. For many, a getaway to Malaysia not only offers better value for money but is also highly convenient, given that Kuala Lumpur is as close, if not closer, than many of Indonesia's key domestic tourist hotspots. This combination of affordability and accessibility has solidified Malaysia's appeal among Jakarta's upwardly mobile travellers.

More shopping bags than carrying flags. As more richer tourists in town, the demand for organised tour declines. According to Tourism Malaysia, organised tour share receded from 5.8% in 2015 to 4.4% after almost a decade. The tourists spend more on shopping and food & beverages as reflected by the share ratio. Also, demand for medical tourism is on an uptrend from 3.1% in 2015 to 4.9% in 2023.

Drivers to Tourism

Rising GDP/capita and the rise of middle-income group. Steady growth in GDP per capita is driving higher disposable incomes, allowing more people to spend on travel and tourism. In 2020, Asia's middle class was estimated at 2bn people, a figure projected to surge to 3.5bn by 2030 according to IMF. This expanding middle class represents a massive addressable market for the tourism industry.

What is particularly compelling is that many Asian countries are transitioning into middle- income status, a phase historically associated with the strongest growth in travel and tourism demand (see Chart 7). These are individuals who, just a few years ago, could not afford to be tourists but now represent a dynamic new consumer base. This contrasts sharply with high-GDP-per-capita countries, where incremental income growth has a far smaller impact on tourism behaviours.

Demographics is supportive for air travel: The median age across most Asian countries remains under 40, with Malaysia standing out as particularly young at just 28.7 years. This youthful demographic is a strong tailwind for travel and tourism, as younger individuals are typically unencumbered by the responsibilities of raising families and often driven by a sense of adventure and a desire to explore.

Current Performance of Malaysia's Tourism Industry

In the first 11M2024, Malaysia welcomed 22.5mn inbound tourists, which is approximately 90% of the run-rate of 2019's. For Visit Malaysia Year 2026, the Ministry of Tourism targets to welcome 35.6mn tourists with a receipt of RM147bn

Kuala Lumpur has secured its spot as the 10th most-visited city in 2024, according to the Top 100 City Destinations Index by Euromonitor International, a renowned London-based market research firm. This accolade reflects a consistent presence in the rankings over the past decade, underscoring the city's enduring appeal as a premier global travel destination.

Hotels are doing very well. Malaysia's hotel industry delivered robust performance in 2024, with average revenue per available room (RevPAR) rising 8.7% YoY, driven primarily by the 5-star and 4-star segments (refer to Charts 12-14).

This strong showing reflects a combination of higher occupancy rates, which reached 58.1% (+5.7 percentage points YoY), and an increase in the average room rate to RM345 (+2.8% YoY). Notably, the outperformance of 5-star and 4-star hotels highlights Malaysia's growing appeal to higher-quality tourists, underscoring a positive shift in the profile of tourists.

Various ASEAN meetings in Malaysia. According to Ministry of Foreign Affairs of Malaysia (MOFA), there are 12 ASEAN meetings in January 2025 to be held in Malaysia. There were two held in the previous month. More meetings are planned in the next 11 months but the details have not been released yet.

Sectors to Benefit from Higher Tourist Spending

A thriving tourism sector benefits several key sectors in the economy, including transport (ground, air, sea), accommodation (hotels, homestay), retail (food & beverage, merchandise, duty-free retail), travel tours, and other service-based industries. We list down below the key sectors and Shariah compliant companies that we believe will benefit from the tourism thematic.

Property & REIT

Tourism-Driven REITs Boost Malaysian Economy Growth. The Malaysian Real Estate Investment Trust (M-REIT) sector delivered standout performance in 2024, underpinned by a strong rebound in tourism and a series of government initiatives that supported the sector. This recovery drove an 11% gain in the Bursa Malaysia REIT Index, marking a significant milestone in its post-pandemic turnaround. Looking ahead to 2025, the sector's positive momentum is expected to continue, positioning M-REITs as a key contributor to Malaysia's broader economic recovery.

A key driver of this growth has been the resurgence in travel and leisure demand, which has provided a substantial boost to tourism-driven REITs. These REITs, which focus on assets such as hotels, resorts, theme parks, and shopping malls, have experienced a marked improvement in performance as international tourist arrivals surged.

The tourism rebound has had significant ripple effects, particularly on retail properties, with malls in high-traffic urban centres such as Kuala Lumpur and Johor Bahru benefiting the most. Increased tourist inflows have driven higher foot traffic and consumer spending. The combination of a strong tourism recovery, supportive government policies, and heightened consumer activity has solidified the M-REIT sector's reputation as a resilient and attractive investment avenue. Looking ahead, the sector is well-positioned for sustained growth, with continued strength anticipated in 2025 as Malaysia's economic recovery gains further momentum. Meanwhile, domestic retail activity has been further bolstered by government measures such as salary adjustments for civil servants and a higher minimum wage. This dual boost has reinforced the appeal of retail assets as key components of the M-REIT landscape, making the sector a compelling option for investors seeking stability and growth potential in the coming years.

KOMTAR JBCC: At the Heart of Cross-Border Opportunities. Al Salam REIT stands to benefit significantly from growing footfall, particularly at its flagship property, KOMTAR JBCC Mall in Johor Bahru. Strategically positioned near Singapore, Johor Bahru has long been a bustling hub for cross-border retail and economic activity, driven largely by the strong exchange rate advantage of the Singaporean Dollar (SGD) against the Malaysian Ringgit. This has made the city a prime destination for Singaporean tourists and shoppers, who currently contribute approximately 70% of the mall's foot traffic.

KOMTAR JBCC, a key asset located within Johor Bahru's Central Business District (CBD) and the Ibrahim International Business District (IIBD), benefits from seamless accessibility via a bridge connecting JB Sentral to the Customs, Immigration, and Quarantine (CIQ1) complex at the Sultan Iskandar Building. CIQ1 is as a critical entry point for various modes of transport, including buses, motorcycles, cars, and lorries, making KOMTAR JBCC a highly accessible retail destination for both local and international visitors.

Looking ahead, several transformative infrastructure projects are set to amplify the value of Al Salam REIT's property portfolio in Johor Bahru. Among these is the Johor Bahru- Singapore Rapid Transit System (RTS) Link, scheduled for completion in 2026. The RTS is expected to facilitate up to 40,000 daily commuters between the two cities, significantly boosting cross-border traffic. Additionally, a new Pedestrian Overhead Bridge (POB), expected to be completed by 2027, will directly link the RTS Bukit Chagar Station to KOMTAR JBCC. This development is projected to double the mall's footfall to approximately 1.7mn by 2027, up from 0.8mn in 2023, as guided by management.

Further enhancing regional connectivity is the KTM ETS Gemas-JB Sentral line, slated for completion in 2025. This rail link will improve access to Johor Bahru, making it more convenient for commuters and visitors to reach KOMTAR JBCC. These infrastructure upgrades align with Transit-Oriented Development (TOD) principles, creating opportunities to attract up to 300,000 daily travellers between Johor and Singapore.

The mall's occupancy rate has already shown positive momentum, rising to 69% in 3Q24 from 63% in 2023. Ongoing tenant repositioning efforts are expected to drive occupancy rates to 70-80% by the end of 2025. With its integration into a comprehensive transportation network that includes CIQ1, CIQ2, and the KTM ETS line, KOMTAR JBCC is well-positioned to capitalise on the anticipated surge in foot traffic. This growth is expected to significantly boost retail sales and solidify the mall's role as a cornerstone of Johor Bahru's retail and economic expansion.

Consumer

Robust Tourism Activities to Benefit Consumer Sector. Robust tourism activities expected in 2025 is anticipated to benefit the consumer sector especially for the discretionary segment due to the higher footprints and the higher quality tourists with better purchasing power. This can be seen from the higher tourism receipts for shopping which is 128% than F&B in 2023 (refer chart 18). Hence, we foresee AEON (BUY, TP: RM1.75), QL Resources (HOLD, TP: RM4.47), and Spritzer (BUY, TP: RM3.30) to reap the boost in consumption spending resulting from rigorous tourism activities.

AEON may see a boost in their topline from the higher tourist footprints due to their strategic mall locations located at the both urban and suburban areas of prominent states (refer chart 19) ; some are the largest mall available in said cities. As at 3QFY24, there are 28 AEON malls, 35 AEON stores and 117 specialty stores such as Daiso, Tsutaya Bookstore, and AEON Maxvalu. AEON guided that their Southern region malls are able to capture higher footfalls stemming from higher Singaporean tourists.

QL Resources on the other hand, could see a boost in their revenue from the increase in tourism activities attributed from the CVS segment. We believe due to the convenience and availability of Family Mart with their unique selling point of Family Mart Mini, the vending machines, conveniently located at strategic locations such as public transport stations, differ them from their competitors. As at 3QFY24, there are in total 395 Family Mart outlets, 131 FamiCafe, and 102 Family Mart Mini across Malaysia (refer Chart 20).

Moreover, the anticipated increase in tourism activities is expected to benefit Spritzer due to its strong brand equity and availability among mineral water players. For instance, Spritzer's mineral water portfolio covers both mineral and drinking water with distinct brand names (refer table 4). Apart from that, unlike developed countries where there are many water hydrants available all around the tourist hotspots and city, tourists coming to Malaysia have no choice but to buy mineral water in convenience stores to quench their thirsts in our all-year round hot weather.

Healthcare

Malaysia's Medical Tourism Supported by Strength in Cardiology. In 2009, Malaysia took a significant step to promote its wellness services globally by establishing the Malaysia Healthcare Travel Council (MHTC). The council's primary aim is to enhance and support the development of Malaysia's healthcare industry to compete internationally. We opine that key factors attracting international patients to Malaysian healthcare providers include (i) competitive medical costs compared to Western nations, (ii) shorter waiting times for treatments and (iii) high-quality medical services and advanced healthcare facilities. In 2023, Malaysia's medical tourism revenue soared by over 70% YoY, reaching RM2.3bn, and surpassing the pre-COVID peak of RM1.7bn. Globally, the medical tourism market has seen substantial growth, fueled by demand for treatments for chronic conditions like cardiovascular diseases. According to Technavio, the global market was valued at USD12.8bn in 2018 and expanded to USD23.3bn by 2022.

Malaysia is recognized for its expertise in cardiology, with over 30 advanced heart treatment centres, including the National Heart Institute (IJN), regarded as one of the leading centres in Asia. The IJN performs over 10,000 cardiac procedures annually. It is worth to note that cardiovascular care has consistently been the largest segment in global medical tourism from 2018 to 2022, growing by USD3.3bn with a CAGR of 16.6%. With strong global demand for cardiovascular care and Malaysia's established expertise, we opine that steady growth in the local medical tourism sector is anticipated.

Cost Comparison and Currency Dynamics in Malaysia's Medical Tourism. Over the past decade, the rise of medical tourism has been driven by factors such as more affordable air travel, escalating healthcare costs in developed countries, and the ageing global population. Medical tourists can save anywhere from 20% to 80% on procedures compared to prices in their home countries. In countries like the US and Europe, medical procedures can be prohibitively expensive, while nations such as Malaysia, Thailand, and India offer significantly lower-cost alternatives. For instance, a heart bypass graft procedure that costs around USD123,000 in the US is priced at approximately USD12,000 in Malaysia. Similarly, a hip replacement costs around USD40,364 in the US, whereas in Malaysia, it is only about USD8,000, and in India, about USD7,200.

Long Waiting Times in Healthcare Systems of Developed Countries. Many Western countries, including the US, experience lengthy wait times due to the complexity of their healthcare systems. In the US, the multi-payer structure, diverse insurance options, fragmented care delivery, complicated billing and reimbursement processes, and extensive regulations all contribute to delays. In 2023, the average wait time for a new patient appointment increased from 21 to 26 days, which is widely regarded as excessive. Similarly, other developed nations like the UK, with its National Health Service (NHS), face long waits for non-urgent procedures, with the NHS aiming to treat patients within 18 weeks for routine care. In Australia, wait times for elective surgeries in the public system can range from weeks to months, while Sweden experiences varying wait times depending on the type of service and regional factors.

In contrast, Malaysia's healthcare system, particularly in the private sector, offers more efficient access to medical services, with appointments typically available within a few days to a week. While public healthcare may have longer wait times for non-urgent procedures, private hospitals in Malaysia generally provide much shorter waiting times, making the country an attractive destination for medical tourists seeking timely care.

Anticipate Consistent Revenue Growth in IHH and KPJ's Medical Tourism Segment. In FY23, over 60% of medical tourists to Malaysia came from Indonesia, primarily from Jakarta and Surabaya. In terms of revenue contribution, Penang generated 40.5%, while Kuala Lumpur contributed 41%. Despite inflationary pressures, we believe healthcare providers can sustain strong earnings growth in the medical tourism segment due to increasing demand for quality healthcare services. With a cost advantage, private healthcare providers in Malaysia are likely to adjust pricing strategies to maintain profit margins.

Although medical tourism contributes less than 15% of revenue for both KPJ and IHH, we foresee steady growth supported by ongoing healthcare digitalisation initiatives. According to BMI and Fitch Solutions, Malaysia's medical devices market is projected to grow at a CAGR of 8.2% from 2023 to 2028, reaching RM15.4bn by 2028. This growth is expected to be driven by the modernisation of healthcare facilities and the rising prevalence of chronic diseases.

Source: BIMB Research -