Club Med Owner Fosun Tourism Sees Sunnier Skies, But Investors Unimpressed

Company’s shares sag 5% after it reports business at its tropical Hainan island mega-resort soared 161% in first quarter of 2020

Key takeaways:

  • The latest data from Club Med owner Fosun Tourism provides further evidence of a strong tourism rebound when the pandemic subsides.
  • A selloff of the company’s shares after the announcement reflects investor caution following a recent run-up in the stock

By Doug Young

Investors are starting to tire of the nonstop stream of optimistic forecasts coming from a global tourism sector that has been one of the biggest victims of the global pandemic.

That’s the impression one gets based on market reaction to the latest upbeat guidance from Fosun Tourism Group (1992.HK), the tourism arm of one of China’s top private conglomerates whose biggest asset is French resort operator Club Med.

Fosun Tourism has just issued a new update on its situation, which hints at the pent-up demand that could explode once the pandemic starts to subside and people begin traveling again. Initial investor reaction wasn’t quite what one might expect, with the company’s shares dropping 5% in Wednesday morning trade in Hong Kong.

We’ll review the report, which gives a relatively detailed view of what we might expect for the battered tourism sector once the pandemic subsides and travel returns to more normal patterns. But first we should point out that tourism stocks, counterintuitive to what one might expect, have actually done relatively well throughout the pandemic.

Before the Wednesday dip, Fosun’s shares had nearly doubled over the last 52 weeks, up 88% to be precise. Shares of Las Vegas Sands, which has a similarly diverse portfolio of resort-style casinos in the West and Asia, have gained 35% over that period. Leading cruise operator Royal Caribbean bucked that trend, though even its shares were down just slightly over that period.

It does seem like everyone is betting heavily on a strong industry rebound once the pandemic is past, and that’s certainly reflected in Fosun’s latest guidance released after markets closed on Tuesday. 

The report includes the latest gloom and doom for the current period, with the company saying revenue from its core tourism operations plunged 74.5% in the first quarter to 1.06 billion yuan ($163 million).

That’s not too surprising, since the company derives about half its revenue from Europe due to the concentration of Club Med resorts there. As many can recall, Europe and North America didn’t really start to feel the pandemic’s impact until the end of March last year, meaning last year’s first-quarter was mostly business as normal in those parts of the world. Obviously, just the opposite was true in this year’s first quarter.

Fosun reported business for its core resort operations dropped by an even bigger 85.3% in the first quarter, as most of its ski resorts in Europe remained closed, and even resorts that were open operated at just a third of their usual capacity.

But the report provided some more upbeat figures for the company’s home China market, where domestic travel has returned to more normal levels in recent months as the country’s Covid situation remains largely under control.

The number of visitors to its Atlantis Sanya mega-resort on south China’s Hainan island rose by 125% during the first quarter, reaching 1.19 million. Actual revenue generated by the resort jumped by an even higher 161%, meaning spending per visitor was up sharply year-on-year. Fosun added that business at the resort in revenue terms was nearly back to pre-pandemic levels, at 93.6% of where it was in 2019.

Qing Ming Holiday

While the Sanya resort posted impressive gains, a better view might come from additional data the company provided for all of its China operations during the country’s four-day Qing Ming holiday in early April, which it compared with pre-pandemic levels. The company’s overall revenue from its tourism and resorts operations in China rose by 53% over this year’s holiday compared with the same period of 2019 before the pandemic.

“The pandemic will continue to have a significant negative impact on the business volume of the group for the six months ended 30 June 2021,” Fosun concluded, stating the obvious, that it expects to post loss for the first half of this year.

A look at some of the other resort-style tourism companies we’ve mentioned above shows similarly upbeat outlook for a post-pandemic world. Carnival Corp., another major cruise operator, reflected the overall mood, saying earlier this month that advanced bookings for 2022 are already ahead of “a very strong 2019,” despite minimal advertising or marketing by the company.

As expected, all of these companies reported huge revenue drops in 2020. Fosun reported one of the milder declines, with its revenue falling about 60% last year. By comparison, Las Vegas Sands’ revenue dropped 74%, and Royal Caribbean’s plunged 80%. Fosun was perhaps helped by its geographic diversity, since Sands is heavily concentrated in Las Vegas and Macau and Royal Caribbean is 100% dependent on cruises that largely came to halt worldwide.

In terms of its stock, Fosun Tourism wasn’t a huge hit with investors before the pandemic, due to the aging nature of the Club Med chain that the company purchased in 2015 at a slightly inflated price of about $1 billion after an unexpected bidding war. The company raised about $428 million in its December 2018 IPO, with lackluster demand causing the shares to price at the bottom of their range.

The stock moved steadily downward after that, despite the company’s rosy forecasts that it could make big money with new offerings in its home China market catering to the country’s emerging middle class. As recently as last October, the stock was nearly 60% below its IPO price, reaching a low of HK$6.47 ($0.83) compared with a listing price of HK$15.60.

The stock has nearly doubled since the October low, though it still trades more than 20% below its IPO price. It currently trades at a price-to-earnings (PE) multiple of 25 based on its 2019 profit before the pandemic began.

That’s still a bit high for this kind of slow-growth company. But if you believe that its profit could grow by 50% or more next year from its 2019 level and you also like the company’s longer-term China growth story, the shares might still represent a reasonable investment at their current levels.

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