The Chinese are coming

With record outbound Chinese tourists numbers this year, we discuss the impact

From the ancient temples of Angkor Wat to the overcrowded hotel buffets in Bangkok, it is clear that the Chinese middle-classes are on the move. Contrary to popular opinion, we believe this is a good thing.

In the last decade the number of outbound Chinese tourists has tripled to 135m and are expected to reach 200m by 2020(1). Whereas in 2008 over 60% of outbound travellers were destined for Hong Kong and Macau, today the breakdown is more mixed and the nations of Southeast Asia are emerging as clear beneficiaries.

This is a double positive; it provides empirical evidence of the middle-class emerging in Asia, second and more importantly for us it supplies the destination countries with engines for economic growth. For example, Thailand, against the backdrop of weaker consumer confidence, played host to 8m Chinese tourists in 2016 up ten-fold since 2007; tourism now accounts for 20% of GDP in the country(2)

The second-order effect is that more tourists increase the impetus for governments to invest in infrastructure. In Vietnam, where total tourist numbers are expected to reach a record 13m this year, the government is planning to build a second international airport 25 miles east of Ho Chi Minh City. This will ease congestion at the existing airport north of the city, congestion that this writer experiences first hand on a weekly basis and can attest to its severity. A six-lane highway linking the new site and city was completed in 2015 and local construction companies are lining up for contracts to build the airport itself. 

The Philippines is a country where infrastructure spending is badly needed. One only has to drive from the airport to the CBD in Manila to understand the chronic underinvestment by successive regimes in the sector. Green shoots are appearing though and tourism is playing its part; Mr. Duterte has ramped up infrastructure spending this year and, in one of his more pragmatic policies, approved the granting of a “visa-on-arrival” to qualifying Chinese nationals.

So how is this trend reflected in our fund? As bottom-up investors, we look to invest in businesses that offer growth at reasonable prices, and would emphasise the “reasonable prices” aspect when looking at the sector. Whilst many tourism plays trade on high valuations, we own a lesser known regional hotel and casino operator. It has a superb business franchise and is a clear beneficiary of the Chinese tourist boom as demonstrated in its 9 month 2017 results. We’re also finding good ideas in the Philippine retail space and think they represent a proxy for tourist growth at undemanding valuations.

We believe this trend is embryonic; outbound travellers make up only 10% of the population in China compared to 38% in Korea and 56% in Taiwan. Regional low-cost airlines are opening routes to penetrate China’s second tier cities and hotel capacity is filling up. If you like all-you-can-eat-buffets in Bangkok, you might have to sharpen your elbows.

By Douglas Barnett

Analyst for the Waverton Southeast Asian Fund

1) CLSA Special Report: Chinese Tourists Expanding Cultural Horizons (Jan 2016)

2) TRAVEL & TOURISM ECONOMIC IMPACT 2017 THAILAND: World Travel and Tourism Council

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