The new James Bond film, Spectre, broke records on its opening weekend in China this month, earning US$48 million. Strong Asian demand prompted talk that Spectre will be Sony’s next billion-dollar movie. It’s halfway there in a matter of weeks.
For context, Spectre, in a single weekend, earned only US$11 million less than the previous Bond instalment, Skyfall, made in its entire Chinese run. That was despite Spectre only being shown in 2D and having weaker critical reviews than its predecessor.
Spectre’s success is good news for Sony shareholders. But it is also an intriguing anecdote on the power of the Asian middle-class consumption boom – a trend that will be among the most profound in history and of vital importance to Australian investors.
Consider what’s ahead. The global middle-class is expected to grow from 1.8 billion in 2009 to 4.9 billion by 2030, on OECD forecasts. Two-thirds of the new middle-class will be Asian. If the OECD is correct, another two billion middle-class Asian consumers will be on Australia’s doorstep within 15 years.
Is it any wonder that Asian leisure and entertainment demand is booming?
Our tourism industry is an early beneficiary. I analysed the tourism megatrend for the Switzer Super Report in August, nominating Sydney Airport, Crown Resorts, SeaLink Travel Group and Ardent Leisure Group as key local beneficiaries of inbound Asian tourism.
SeaLink has soared 45% since then, Ardent is up 15% and Sydney Airport has rallied 14% in a flat market. Crown Resorts has disappointed, falling 16% since that report. Crown looks reasonably valued at the current price.
Australia’s tourism industry has incredible potential. International visitors to Australia spent $33.4 billion in FY15, up 10% on the year and the best since 2001, Tourism Research Australia data shows. Chinese visitors rose 22% to 862,000 and their trip spend increased 7% to $7 billion. Chinese tourists now account for 21 cents of every dollar that international tourists spend here.
Impressive as they are, these numbers are only scratching the surface. Surveys show the high intention of Chinese tourists to travel to Australia is not matched by their actions. Globally, Australia has a small slice of Chinese tourism, but there is potential for market share gains.
Our tourism industry can do much more to win Chinese travellers. Our airports, by global standards, are antiquated and have poor facilities and signage for Asian travellers. Our tourism marketing to Asia, with some exceptions, can improve. And our tourism attractions need to be better aligned with the needs of Asian tourists.
If our tourism industry gets it right, a services export boom to Asia will be the next phase of explosive growth, after mining and agriculture.
The challenge for investors is finding tourism and entertainment stocks that are leveraged to Asian demand and still attractively priced. The three stocks below have excellent long-term prospects as Asian tourists flock to our hotels, theme parks and casinos. None are cheap, but their earnings could be stronger than the market expects as the tourism boom unfolds.
1. Village Roadshow
The owner of Gold Coast and Sydney themes parks, cinema operator and film distributor has clawed back market confidence this year after a disappointing first half in FY15. Village has rallied from a 52-week low of $5.08 to $7.22.
Village’s second-half result helped it top consensus analyst forecasts for the full year and sparked a re-rating of its stock. A strong showing from its Australian cinema business offset a disappointing start at its Sydney Wet’n’Wild theme park.
The momentum should continue in FY16. A new theme-park ticketing strategy, where consumers pay in monthly instalments, will boost earnings this financial year. A summer of blockbuster movies such as Spectre and the latest Star Wars instalment should drive sharply higher cinema attendance, particularly in the better-margin Gold Class offerings.
Village’s Gold Coast themes parks – Sea World, Wet’n’Wild and Movie World – should benefit from an expected warmer, drier summer, and continued strong growth in Asian tourism to south-east Queensland. A bumper summer movie season also provides more cross-promotion opportunities to drive theme park attendance.
Five of seven broking firms that research Village have a buy recommendation and two a hold, consensus estimates show. A median price target of $7.15 suggests Village is fully valued. That valuation looks about right for now, but Village has potential to beat market estimates in FY16, given this summer could be its most promising trading season in several years.
Village Roadshow
[1]Source: Yahoo!7 Finance, 19 November 2015
2. Mantra Group
Australia’s second-largest accommodation provider serves two million guests annually through more than 100 Peppers, Mantra and Breakfree hotels, and is an obvious beneficiary of growth in inbound Chinese tourists seeking accommodation.
Mantra listed on ASX in June 2015 through a $239-million initial public offering (IPO). The $1.80 shares have soared to $4.35, making Mantra among the best IPOs in years.
Stronger-than-expected earnings growth has justified the re-rating. Mantra reported underlying earnings (EBITDA) of $73.1 million in FY15, slightly ahead of market expectation and its upgraded guidance.
I like Mantra’s medium-term prospects. More Chinese tourists will drive demand for its Queensland leisure properties and offset lacklustre corporate demand in its CBD properties. An expected lower Australian dollar is another potential tailwind, as is a slight recovery in domestic consumer and business travel demand in the next two years.
Longer-term, a capital-light business model and good balance sheet offer scope to continue opening new hotels and upgrade existing ones. New hotel openings in Queensland could be the catalyst for further share price growth in FY16.
Mantra is due for a share price pullback or consolidation after stellar gains. The median price target from a consensus of nine brokers is $4. But few Australian companies have more direct leverage to Chinese tourists in the coming decade. Management is pulling the right strings. Customer satisfaction ratings at its properties are high, and hotels are being opened or upgraded just in time to cater to for an influx of Asian tourists.
Mantra is in a sweet spot.
Mantra
[2]Source: Yahoo!7 Finance, 19 November 2015
3. The Star Entertainment Group (previously Echo Entertainment Group)
The integrated resorts operator is driving a multi-billion-dollar investment program to capitalise on Asian demand for Australian casinos and hotels.
Its flagship Sydney casino, The Star, will benefit from another $500 million in refurbishment and additions over the next five years, in addition to an $870-million refurbishment program (2009–13) that has driven noticeably improved performance.
A $345-million redevelopment of Jupiters Hotel & Casino is well underway and the group is leading a consortium on the multi-billion-dollar Queen’s Wharf project in Brisbane, due for completion in 2022. If all goes to plan, The Star will own and manage three leading, much larger, integrated resorts as casino demand from Asia grows.
I like The Star’s strategy. Having three upgraded or new casinos under one brand vastly improves its ability to market in Asia and cross-promote its offerings in Australia. Encouraging Sydney casino visitors to extend their stay in Brisbane, or Brisbane visitors to spend time at the Gold Coast, has real earnings upside.
The Star, of course, has big challenges. A second legal Sydney casino at Barangaroo will be formidable competition, although it could help the western edge of the CBD become a much stronger entertainment precinct and benefit both casinos when it opens in 2020. Also, The Star’s large capital works program has execution risk, but is being managed well so far with little disruption to operations or earnings.
Domestically, The Star has potential to get more punters out of clubs and into its casinos. But the real jackpot is Asian tourists who choose Australia and move between the Star’s east coast casinos. The well-run group looks like it has timed its expansion perfectly.
The Star looks slightly better value than other large tourism stocks. Six of 11 brokers that cover it have a buy recommendation, three a hold, and two a sell. A median price target of $5.55 compares to recent trades around $4.80.
Like others on this list, The Star is a long-term play on Asian tourism. With Crown Resorts, it dominates the Australian integrated market and is a natural beneficiary of fast-growing Asian demand for our casinos. The Star and Crown can carve up this market for years to come, such are the barriers to entry for new casino operators in our capital cities.
In Bond speak, the next decade could be Casino Royale for the largest Australian operators as the middle-class Asian consumption boom spark a tourism bonanza.
The Star Entertainment Group
[3]Source: Yahoo!7 Finance, 19 November 2015
Tony Featherstone is a former managing editor of BRW and Shares magazines. The column does not imply any stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at November 18, 2015.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.