ERW – Preview 3Q24: Weak quarter

Expect 3Q24 to be a weak quarter. We estimate core profit at Bt119mn, down 24% YoY and 6% QoQ on a weak luxury hotel segment. Including extra items in 3Q23 (pre-operating cost for HOP INN hotels in Japan) and 2Q24 (an accounting item related to asset acquisition from ERWPF), net profit in 3Q24 will drop 20% YoY and 67% QoQ.

Weak luxury segment. In 3Q24, the luxury hotel segment (~40% of revenue) was its weak point, with a flagship The Grand Hyatt Erawan Bangkok Hotel hurt from cancellations following guests’ incident unrelated to the hotel itself on July 16. We expect RevPar to drop 4% YoY and 6% QoQ on a fall in occupancy rate to 71.5% (from 82% in 3Q23 and 79% in 2Q24); however, ARR will be solid (+10% YoY and +4% QoQ). We expect RevPar for the midscale segment (23% of revenue) to slip 2% YoY (but rise 3% QoQ) because of renovations at Holiday Inn Pattaya Tower 1. The economy segment (13% of revenue) is poised to be the strength behind RevPar growth of 15% YoY and 3% QoQ, on a high occupancy rate and ARR. We expect RevPar at HOP INN Thailand (13% of revenue) to grow 5% YoY but slip 2% QoQ, but at HOP INN Philippines (8% of revenue) to fall 22% YoY and 20% QoQ due to the three newly-opened hotels in 2Q-3Q24. HOP INN Japan (4% of revenue) will slip QoQ with a seasonal 16% QoQ drop in RevPar.

4Q24F to improve QoQ but be flat YoY. Our 3Q24 preview suggests 9M24 will account for 69% of our 2024 forecast and we leave it unchanged, with 4Q24 core profit flat YoY (higher interest expense) but up QoQ (seasonality and the completion of renovation at Holiday Inn Pattaya Tower 1). Note that our 2024 core earnings forecast is 7% below market consensus.

Neutral rating maintained. In 2025, Thai tourism will continue to grow but we see this as an unexciting year for ERW since operations will have a short-term hiccup from renovations at The Grand Hyatt Erawan Hotel starting in 2Q25. Additionally, we believe the market will wait for clarification on the renewal of that hotel’s lease. The 20-year renewal is being negotiated and until then, ERW has been renewing the lease on a year-to-year basis (through July 2025); it is currently finalizing the contract details with the lessor to benefit both parties, but a specific timeline cannot yet be determined. End-2025 DCF TP is Bt4.6/share, based on WACC at 6.2% and LT growth at 2%.

Risks are: 1) an economic slowdown that would derail travel demand, 2) political uncertainty and 3) cost inflation that would damage profitability. We see ESG risk as effective environmental management (E).