22 August 2023
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" Expect 2Q23 earnings to be the bottom quarter "

We expect 3Q23 core earnings to expand strongly from low season in 2Q23 supported by continued solid demand from foreign tourists especially in Bangkok and Pattaya hotels together with mild recovery in MICE segment. Revenue-per-available-room (RevPAR) for non-Hop-Inn should stand above 3Q19 period by 35% while benefit from effective close control remained. Better-than-expected performance during low season and average room rate (ARR) that stood high prompted us to revise core earnings forecasts up by 51% and 12% in 2023E and 2024E, while raised fair price up to Bt5.40. (Previous FP: Bt4.60) ERW is trading at premium 26.9xPE’24E vs. peers (excl. AWC) at 22.0xPE’24E, despite its earnings growth in 2024E (+12%) at discount to peers given unexcited expansion plan in 2024 and high base effect. Thus, we reiterate HOLD.

2Q23 earnings remained solid amid low season

• The company reported 2Q23 net profit at Bt142m. Stripping out extra items, core profit would be at Bt133m. (-44%QoQ turnaround from Bt131m in 2Q22) The result came out above market estimates while 2H23 accounted for 49% of our full-year core profit forecast.

• QoQ hiccup was due to impact from low season as hotel revenue that fell from 4-year high in 1Q23 to Bt1.6bn. (-7%QoQ +67%YoY) Revenue from luxury segment (39% of revenue in 2Q23) dropped 10%QoQ, but RevPAR remained solid at 37% above 2Q19 level, underpinned by ARR that grew by 46%YoY while staying 17% above 2Q19 level. RevPAR for Mid-scale and Economy segments (40% of revenue) remained at above 2Q19’s level by 14% and 46% respectively, supported by pent-up demand from foreign visitors. Thai Hop Inn’s RevPAR continued to hit record high at Bt533/night as occupancy rate remained high at 81% while ARR still on its uptrend along with solid local business travelling demand. RevPAR for Philippines hotels also climbed to record-high while staying 8% above pre-COVID level with high satisfied occupancy rate at 74% and record high ARR in 2Q23.

• EBITDA margin in 2Q23 contracted to 30.0% from high base at 33.0% in 1Q23, but stood above 2Q19 level at 22.4% on the back of solid lift in ARR and effective cost control amid rising utility-food costs and concern over scarcity in hospitality workforce.

**Expect earnings to expand strongly in 3Q23 **

We expect occupancy rate for non-Hop-Inn segment (76% of EBITDA in 1H23) to start recovering to 82% from 80% in 2Q23 as demand from foreign tourists rebound after low season especially for Chinese market (16% room-revenue contribution for non-Hop-Inn in 2Q23), which should reflect to ARR to be able to stay at 21% above 3Q19 level. We do not expect sluggish recovery pace of Chinese tourists to create our earnings downside as ERW’s premises are almost fully occupied under the current market conditions. The management revised up their target guidance on occupancy rate to 78-80% and RevPAR to expand 50% in 2023, despite slow recovery in MICE. Incorporating with effective cost control, these should translate into half-on-half improvement in earnings for 2H23.

Unexcited expansion plan in 2024

The company maintain is target to open 15 locations of Hop-Inn in Thailand and three hotels in Philippines and recognize them as revenue in 2024 under CAPEX at around Bt1.6bn. Theses should add approximately Bt150m EBITDA in 2024E. We do not expect sizable investment for ERW in the next two years given its tight interest-bearing-debt/equity ratio at 1.6x and threat from upcoming hotel supply particularly in upper-luxury segments.