HOP INN Expansion In Thailand And Japan Will Increase Presence But High CapEx Poses Financial Risk

Key Takeaways

• Expansion in the budget segment with HOP INN hotels and new locations in Thailand and Japan is expected to drive substantial revenue growth.
  
• Focus on cost management and renovating luxury properties is anticipated to enhance margins and increase overall revenue and profitability.
  
• Heavy reliance on Chinese tourism and high CapEx for budget hotels could threaten revenue stability and profit margins amidst external vulnerabilities.

Catalysts

Engages in hotel, and building rental and management businesses primarily in Thailand, Japan, and Philippines.

• Expansion of new properties, particularly in the budget segment (HOP INN hotels), is expected to drive substantial revenue growth. New hotel openings in Thailand and Japan are poised to increase the overall room count and generate additional income streams.
  
• The company's focus on effective cost management and productivity improvements is anticipated to enhance net margins, as evidenced by the current improvements in EBITDA margins. This continued focus suggests potential for greater profitability.
  
• Investments in renovations and upgrades at Grand Hyatt and The Naka Island are aimed at increasing the appeal and revenue of luxury offerings, potentially driving a rise in RevPAR and boosting overall revenue.
  
• The forecasted strong growth in the budget segment, driven by domestic demand in Thailand and the Philippines, is expected to significantly bolster revenue and EBITDA, providing a stable foundation against international uncertainties.
  
• The commitment to the development of a new mid-scale property by 2029 in Sukhumvit, introducing new brands and potentially higher ADR, is projected to fuel consistent long-term growth and impact future earnings positively.

Erawan Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Erawan Group's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.9% today to 11.6% in 3 years time.
• Analysts expect earnings to reach THB 1.1 billion (and earnings per share of THB 0.24) by about April 2028, down from THB 1.3 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting THB1.3 billion in earnings, and the most bearish expecting THB937 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 37.2x on those 2028 earnings, up from 9.1x today. This future PE is greater than the current PE for the TH Hospitality industry at 18.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.21%, as per the Simply Wall St company report.

Erawan Group Future Earnings Per Share Growth

Risks

• The strong reliance on the Chinese market, which represented over 40% of Thailand's growth in Q4, poses a risk due to potential fluctuations in Chinese tourist numbers, impacting overall revenue stability.
  
• The anticipated normalization of growth rates after a period of high double-digit growth could lead to lower-than-expected revenue increases, affecting the company's future top-line growth projections.
  
• The slowdown in Chinese New Year demand due to geopolitical incidents suggests a potential vulnerability to external macroeconomic factors, which could affect revenue from international markets.
  
• The decline in occupancy rates from 83% to 81% in Q4 indicates potential challenges in maintaining room volumes, which might impact revenue and profit margins if not offset by higher ADR (Average Daily Rate) increases.
  
• The high CapEx budget of THB 3 billion, particularly for budget hotel expansions, poses a financial risk, as a failure to achieve expected occupancy and revenue could stress profit margins and net earnings.

Valuation

• The analysts have a consensus price target of THB4.618 for Erawan Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB6.2, and the most bearish reporting a price target of just THB3.1.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be THB9.6 billion, earnings will come to THB1.1 billion, and it would be trading on a PE ratio of 37.2x, assuming you use a discount rate of 14.2%.
• Given the current share price of THB2.38, the analyst price target of THB4.62 is 48.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.