Why Asia’s travel stocks could be set to take off 

With international borders closed, domestic travel in Asia appears to be going through a revival

Why Asia’s travel stocks could be set to take off
Henan province in eastern China has a host of attractions that are popular with tourists, such as the Longmen Grottoes in Luoyang. Officials are encouraging citizens to travel to local destinations until international travel returns to normal. File pic: Henan provincial tourist board. 

(ATF) As economies around the world grapple with the reality that regional and overseas travel may take years to recover, China’s tourism sector appears to be rejuvenating.

Stocks in Chinese airports have rallied almost 10% collectively since March, according to Bloomberg data, as air travel routes within the country re-open. Casino and hotel stocks in neighbouring Macao have likewise seen a revival, despite a reported 97% decline in monthly revenue from the year before. 

Since China announced an easing of domestic tourism restrictions in mid-July, there’s been a new-found optimism for Asia’s travel industry. 

While shares of most major airlines and travel agencies around the world struggle to pick up from their devastating collapse in March, China’s tourism and airline stocks have largely recovered to around half of pre-Covid-19 levels. 

It appears the awaited post-crisis travel boom is beginning – just not for everyone.

Travel industry’s predicament

For the last decade, Chinese travellers have been the industry’s biggest global spenders. In 2019, they spent around US$260 billion, making up a whopping 21% of global tourism expenditure, according to UN data.

But with new Covid-19 outbreaks forcing governments to restrict borders indefinitely, analysts predict that international travel will take years to recover. In an update last week, the International Air Transport Association predicted air travel wouldn’t return to pre-crisis levels until 2024.

That’s an enormous blow for many economies. The travel industry contributes around 10% of global GDP, according to Statistica data. In Australia, tourism alone accounts for 10% of total exports and 20% in New Zealand.

Chief investment officer at Mandarin Capital Ltd, Nitin Dialdas, told Finder in a recent survey that while some sectors have been able to stage a recovery despite the pandemic, tourism relies on a Covid-19 cure.

“Business will be able to be done through video to a certain extent but tourism, travel and hospitality businesses will continue to be hit until a vaccine is found,” he said.

China’s travel revival

Until a cure is found, domestic travel has been pegged as the industry’s shining light. For high population countries like China and India where domestic tourism already dominates the market, the horde of new local travellers are likely to be a boon to the industry. 

For China and India it means hundreds of billions in tourism money that normally leaves its shores might instead go to local vendors.

The numbers are already promising for China. Passenger numbers on China’s domestic airlines have already reached 50% of pre-crisis levels while hotel occupancy rates are back to 60%, according to new McKinsey research.

Shares in Hainan Meilan International, the country’s gateway to popular holiday destinations in Hainan – dubbed “China’s Hawaii” – have risen by more than 300% after expansion plans were completed this year.

Flight numbers are also picking up, increasing as much as 60% of pre-pandemic levels, according to Western Securities. In a recent long holiday weekend on 1 May, Chinese traveller numbers leapt 50% on day one compared to a previous holiday in early April, research from Reuters found.

As China’s economy bounces back, its stock market is also outpacing the rest. China’s Shanghai Composite Index is up around 15% over the last three months (6 May to 3 August) while the New York Composite and ASX 200 index is up 9% and the FTSE 100 just 2%.

In a recent report by Finder, global investment analysts rated China’s Shanghai composite as the third most likely to be the top performing global index over 10 years, while China 50 was ranked fifth.

Meanwhile, major US-listed stock Alibaba – China’s answer to Amazon and a marker of the country’s economic health – is up 29% (1 May to 31 July). Social media giant Baidu has also risen 24% over the same period.

Are travel stocks cheap?

After legendary investor Warren Buffet ditched airline stocks from his Berkshire Hathaway fund in May, analysts have been torn over whether it was the smart decision.

Tourism sector stocks have been among the worst hit by coronavirus. But with stock prices so low, some investors believe they’re going cheap.

In a recent survey by Finder of investment analysts, nearly one-third of the 32 respondents said there were bargains to be found while half said travel stocks were still too risky.

Global cruise company Carnival Corp, which was at the centre of the crisis, has seen its share price more than halve since March. Stocks of major international airlines such as Delta, United Airlines, American Airlines and Qantas have remained down around 50% since February. 

Others have fared worse. In April, debt-laden Virgin Australia collapsed under the strain of the pandemic, making it the largest carrier to enter administration post-crisis.

Investment analyst Lulama Qongqo of Mergence Investment Managers said the new environment has made it difficult to predict which stocks will do well.

“I think that the travel companies can get cheaper or go bankrupt. It’s hard to predict which cruise liners or airlines can stay liquid longer than the pandemic can wreak havoc,” Qongqo said.

Simon Brown, founder of Just One Lap, told Finder there’s too much uncertainty in the sector for any big investment opportunities. 

“Travel is going to be hit very hard and we have no way of knowing what the industry will look like after the pandemic,” he told Finder.

Meanwhile, one analyst – Adrian Chia, director of MACS Capital Sdn Bhd, agreed that travel stocks were a bargain, but only from China.

What will a recovery look like?

Ultimately, the travel industry’s revival comes down to a number of factors, like how long the crisis continues for and how effective a vaccine is, IG Australia market analyst Kyle Rodda said.

“An issue is whether this crisis ends only gradually, or by some miracle, probably due to the discovery of a vaccine, acutely. In the latter case, stocks roar, credit markets go berserk,” Rodda said.

Even if a vaccine is found, it’s anyone’s guess what the travel industry will look like over the next 10 years. Fears of another pandemic might see travellers restricting their routes or airlines reducing passenger numbers.

According to market analyst Jess Amir of Australian brokerage Bell Direct, there are investment opportunities to be found within travel, though they may not be the same as before.

“Travel will return but it will look a lot different to how it used to be... Qantas for example, looks set to see a surge in flights amid pent-up demand. Qantas is also planning to return to 40% domestic capacity by the end of July,” she told Finder.

While domestic travel might go through a revival, high-population countries will be the biggest beneficiaries. Meanwhile, countries like Australia, Thailand and those in Europe that largely target the lucrative Chinese market will need to rethink their strategies.

Kylie Purcell is investments editor at Finder.com