Clearly, currency and equity index volatility has been very high ahead of today’s UK referendum. I remain of the view that both the outcome of that referendum is a ‘coin toss ‘ as is the market’s reaction to either outcome. On that basis, I remain somewhat on the sidelines and will use whatever happens as an opportunity to increase exposure to the medium-term structural growth themes I believe in.

This is a classic situation of trading versus investing. There will be a trading response to “Brexit” or “Bremain”, and it may not be what we expect. You’ve seen already that markets are basically tracking betting odds, but what happens next is anyone’s guess. That is why I am NOT trading this event, I am looking for INVESTMENT opportunity inside what will be genuine volatility. As I always say, “in volatility there is opportunity”.

My no.1 medium-term structural growth theme remains the rise of the Chinese International Tourist. This is exactly the same as the rise of the Japanese International tourist in the 80’s/90’s. We forecast that 200 million Chinese Nationals will travel internationally annually by 2020, up from 120 million currently.

This is classic top down meets bottom up growth investing where I am identifying a strong macroeconomic growth trend, that is not reliant on central banks or government, then picking bottom up the best companies globally and locally that will generate earnings and dividend growth from that macro tailwind.

The sectors with leverage to the rise of the Chinese International Tourist include, but are not limited to, Airports, Airlines, Cruise Lines, Destination Casinos, Luxury Brands, Theme Parks, Restaurants, Hotels and other tourism service operators.
Australia is extremely well positioned due to time zone, distance from China, increasing airline capacity and lowered visa restrictions to capture a disproportionate percentage of the growth in Chinese International Tourists.

One way we keep check on the growth trend in Chinese International Tourists is via Airport passenger data. Thankfully, Sydney Airport (SYD) publishes monthly traffic statistics that paint a very clear picture of the growth in passenger numbers and from where they have originated.

This week, Sydney Airport published their May statistics and it again confirmed the international inbound growth trend into Australia’s key international airport. This is very good news for Australian listed tourism operators and the broader Australian economy due to the multiplier effect of tourist dollars.

Sydney Airport International passenger traffic continued to perform strongly during May, growing +7.8% compared to the prior corresponding period. The result was driven by a +12.1% increase in seat capacity.

Strong foreign demand (+9.8%) contributed to the international passenger growth, with Chinese (+13.1%), USA (+16.8%), Indian (+13.8%), Philippine (+27.3%) and Korean (+11.5%) nationalities performing well. Chinese nationals increased by nearly 10,000 and were the largest foreign contributor to incremental passengers, primarily due to an increase in seat capacity from new and existing Asian airline customers.

It’s also worth noting that Australian outbound passengers also grew strongly, increasing by +5.7%. Indonesia (+33.1%), USA (+6%), Thailand (+19.2%), China (+19.5%) , Japan (+29.5%) and Hong Kong (+4%) were among the fastest growing destinations for Australian visitors due to significant seat capacity increases.

All in all, the Sydney Airport May passenger data confirms again that Chinese tourists numbers continue to grow into Australia. This is clearly good news for Australian tourism operators who are catering to the needs of Chinese tourists.

The two key Australian plays in my opinion remain Crown Resorts (CWN) and Star Group (SGR).

Last week Crown announced a demerger proposal that was warmly welcomed by the market, sending the shares up 13%. The logic of the demerger is undeniable, with the Crown board acting on their view the current CWN share price is “materially undervalued”. It makes perfect sense to split to a 100% dividend payout ratio domestic version, an offshore asset version, and a REIT holding half the domestic property assets (outside of CWN Towers in Melbourne).

While the exact details of the CWN demerger will take time to confirm, probably six to nine months, the stock will remain supported on the fact that the board is clearly headed down a value release path. I’ll update you on my view of CWN as we go along but it remains positive as it has for the best part of a decade.

Today, I thought I’d reaffirm my investment thesis on Star Group (SGR). We are very high conviction on SGR here at AIM.

SGR’s three key assets are the Star Casino in Sydney, Jupiter’s 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 that 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 1H, 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 non-gaming cash revenue +7.9% despite disruption from buffet and hotel refurbishments. Yes, never 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 +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 facelift, 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 $504m and undrawn bank facilities of $445m.

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

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.

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’s 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 a 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, and our biggest single investment on them is Star Group (SGR).

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.