I want to continue exploring one of my key structural macroeconomic themes: the rise of the Chinese international tourist.

My view remains that the rise of the Chinese international tourist is no different to the rise of the Japanese international tourist in the 80’s/90’s.

Australia remains perfectly placed in the time zone to capture a disproportionate revenue share of these Chinese international tourist dollars, as long as we provide the services the Chinese international tourist is seeking.

I want to start this note by re-visiting Sydney Airport (SYD) data, Australia’s international gateway airport, to confirm this macro trend is highly relevant to Australia.

In the SYD 2015 result, they confirmed total passengers grew 3% to 39.7m. International passenger growth was 4.3%, and domestic 2.3%. The international growth was driven by services commencing from six new airlines.

Chinese national passengers grew by 17.8%, second only to the 36.7% growth registered from the Philippines. Capacity from China grew 8% to 1,301,616 seats per annum.

Those numbers were from 2015 and since then SYD have released their January 2016 traffic statistics, which were exceptionally strong. SYD experienced total passenger growth of 7.5% in January, driven by a 9.5% rise in international passengers and a 6.2% rise in domestic passengers. Obviously there is an impact from the growth of international passengers on the domestic network. To put this in context, January was SYD’s strongest passenger growth month in over a decade, driven by Chinese arrivals being up 38.9% yoy. SYD expects to welcome 430,000 Chinese passport holders during the peak January to March lunar new year period.

Top 10 nationalities travelling through Sydney Airport

This data confirms the structural inbound Chinese tourist growth, aided by capacity additions on airlines from mainland China. Outside of Sydney Airport (SYD) and Qantas (QAN), the question then becomes, who else is positioned to benefit from this structural growth theme?

My answer is Star Group (SGR).

SGR’s three key assets are the Star Casino in Sydney, Jupiters on the Gold Coast, and the Brisbane Casino, which is to be known as the Queen’s Wharf development.

These are three currently monopoly assets in key east coast locations. Management believes 1:3 of every Chinese visitor to Australia steps foot into a Star Group property. That is an amazing statistic and one which confirms SGR is a key play on this structural growth theme.

With Crown Sydney being pushed back a few years in opening time, it does allow SGR to further cement its monopoly position in Sydney, Brisbane and the Gold Coast during this structural shift up in inbound tourism numbers.

In the SGR 1H FY16 numbers, you can see clearly the effect of increased visitation in their “mass market” numbers. For the first half, domestic table revenues rose +12.3% across the group, slots revenues grew +7.4%, and non-gaming cash revenue grew +3.2%. That drove normalised EBITDA +18.6% vs. PCP and normalised NPAT +26.1% vs. PCP.

At SGR’s marquee property, the Star Sydney, visitation was +4.1%, but more importantly, spend per visitor rose 8.6%. This drove up non-gaming cash revenue by 7.9% despite disruption from buffet and hotel refurbishments. Yes, don’t underestimate how important the buffet is!

At the mass market level, as measured by electronic gaming machine (EGM) activity, the Star continues to take market share from other facilities (pubs and clubs). The Star saw EGM revenue rise 12.8% in the 1H, while group EGM revenue grew 10.7% vs. PCP.

While the current businesses of SGR are travelling well, what attracts me most to SGR is the future growth plans led by major refurbishments of their monopoly Brisbane and Gold Coast properties. These once tired properties are about to see major investment and a major face lift, to truly make them “destination casinos”. It’s not before time, I hear you say, and you are correct.

SGR’s balance is well funded and able to fund its share of these major developments. SGR has net debt of $504 million and undrawn bank facilities of $445 million.

Let’s have a look what is coming for Brisbane (Queens Wharf) followed by the Gold Coast (Jupiters).

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There are also further plans for Sydney (The Star).

This is what attracts me most to SGR: they are heavily investing in the future ahead of what I believe will prove a genuine structural growth theme: the rise of the Chinese international tourist. If they get this right and build a product the Chinese visitor likes, then SGR will prove a structural earnings and dividend growth stock with regulatory certainty. They may also get some regulatory relief in terms of a lower tax rate at the Star from this October.

You can see in the chart below that the share price (white line) tends to track the consensus earnings revisions (red line). I expect that to continue.

Similarly, the consensus EPS forecasts for the next few financials years show structural growth. My view is these consensus estimates will prove conservative.

SGR consensus estimates for FY16, FY17, and FY18

SGR commands a marginal P/E premium to the ASX200 Index and a yield discount. You have to expect a slight P/E premium for the growth, and as I always say, dividend growth is far more important than dividend yield. The best long-term investments have dividend growth, not just dividend yield as such.

Interestingly, these attributes recent attracted the respected long-term value investor Perpetual (PPT), who disclosed a 41,610,830 shareholding in SGR. That represents 5.04% of SGR and I’d consider that investment from a respected investor as confirmation that this company is headed in the right direction.

With all this growth ahead of it, it’s also not beyond the realms of possibility that at foreign casino operator also sees the attractions of SGR and attempts to take it over. SGR currently trades on a P/E discount to major global listed peers such as Las Vegas Sands (22x), Wynn Resorts (30x) and MGM Resorts (29x).

I see no reason why SGR shouldn’t be re-rated up to a 20x multiple by investors as more become aware of the structural growth that lies ahead. 20x FY17 EPS of 32c sets a 12-18 month away price target of $6.40. I think that is a realistic price objective.

This is a well-run company with monopoly assets, growth projects, and a structural tailwind in terms on visitation. I think it’s one to buy and hold for the next three years as Australia welcomes millions of Chinese international tourists.

The AIM Global High Conviction Fund has a big bet on what we believe is this structural growth theme, We own Star Group (SGR), Qantas (QAN), Sands China (1928 HK) and Wynn Macau (1128 HK). We also feel the worst is behind Macau, but that’s a story for another day on the same theme.

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.