Bumpy Ride For Fosun Tourism As Bargain Holidays On The Rise

Key Takeaways:

• Fosun Tourism issued an earnings alert projecting revenues in the first half of the year would grow by 8% or more, generating at least 300 million yuan in profit
• The company’s share price has fallen nearly 38% so far this year as reports of possible asset sales have shaken investor confidence

By Fai Pui

Summer holidays are in full swing as travel demand bounces back from the pandemic years. But boosting profits is still an uphill trek for one leading Chinese tourism company.

Fosun Tourism Group, the owner of the international Club Med chain and the Atlantis Sanya mega-resort in southern China, issued guidance last week that predicted revenues for the first half would be at least 8% higher than in the same period a year earlier, benefiting from a continued recovery from the Covid downturn.

But the figures failed to put the market in a holiday mood. Half-year profits were projected to reach at least 300 million yuan ($41.4 million), compared with the 470 million yuan booked in the first six months of 2023, when earnings were inflated by about 280 million yuan from the disposal of the group’s Kemer resort in Turkey and the sale and leaseback of Les Boucaniers, a resort in Martinique.

Fosun Tourism’s shares initially rose as much as 3.7% after the earnings estimates but the gain had shrunk to just 0.5% by the close of trade, and the meager rise was followed by a three-day decline. As of last Friday, the stock had fallen about 37.7% so far this year, in contrast to a 22.5% rally by Trip.com TCOM and a year-to-date drop of just 5.7% for Tongcheng Travel (0780.HK).

China’s tourism market may be in recovery mode, but more consumers are looking to travel on a shoestring as the economy sputters. Although the number of trips has matched or exceeded pre-pandemic levels, travelers are taking advantage of bargain prices. At the summer holiday peak, when hotel tariffs and airfares would usually surge, fierce competition has kept a heavy cap on prices this year.

As of mid-July, the average domestic airfare was 6% cheaper than in 2023, according to industry data, while the average price for three- or four-star hotels fell 8% and the nightly rate for international hotels plummeted 24%. At the same time, domestic tourists showed a preference for cheaper destinations in China’s fourth- and fifth-tier cities. During the summer holiday period, travel orders in China’s fifth-tier cities jumped by 34% from the year-earlier level, and rose 22% for counties, outperforming the top-ranking cities that are usually a tourism magnet during the mid-year getaway.

The figures show that the so-called “consumption downgrade” is an active force in the tourism industry, as companies slash their prices to defend market share in an uncertain economic climate. The phenomenon could prove costly for Fosun Tourism, with its focus on the middle and high ends of the vacation market.

Meanwhile, investors are nervous about the state of the parent company, Fosun International (0656.HK), fearing that the travel business may have to shed more of resort assets to help tackle a heavy debt load at the wider conglomerate.

In March this year, the market was abuzz with rumors that Fosun Tourism was considering selling stakes in its two big earners, Club Med and Atlantis Sanya, to state-owned Chinese enterprises and deep-pocketed buyers in the Middle East to help the parent pay down its debts.

Risk Of Fire Sale

Notably, the reports did not draw an outright denial from Fosun Tourism. Instead, the company said it continued to “review and optimize” its portfolio, with the aim of growing its core business and bolstering its operations. The company went on to say its business was operating well and its financial position was robust. The equivocal response made investors anxious about what might lie ahead.

Fosun International acquired Club Med in 2015 for about $1 billion, using the globally famous brand as a springboard for overseas expansion. Last year, takings from Club Med accounted for more than 80% of Fosun Tourism’s total revenue. As travel roared back from the pandemic, Club Med’s turnover jumped 19% to 15.12 billion yuan last year, and the average daily bed price rose about 9%.

Meanwhile at the Atlantis Sanya resort on China’s southern island of Hainan, a holiday complex with restaurants, water parks and other entertainments, turnover reached a record high of 1.65 billion yuan last year, an increase of 91% from the same period a year earlier. Adjusted EBITDA rose 158% to 745 million yuan, making it a key growth engine and source of cash flow for Fosun Tourism.

In the first three months of this year, Club Med’s turnover grew by about 15.2% to 6.08 billion yuan from the year-earlier quarter, and the average daily bed price rose 8.8% to about 2,190 yuan. But it was a less positive story at Atlantis Sanya, which eked out a turnover increase of just 4.5% to 576 million yuan. Worryingly, the average daily room rate fell 2.8% to about 2,500 yuan.

Club Med and Atlantis Sanya are still growing, so stakes in those assets could fetch a good price. But a sell-off would risk hollowing out Fosun Tourism’s business, which also includes the Taicang Alps resort in Suzhou, the Lijiang Club resort in Yunnan, and the Foryou Club. The uncertainty has taken a toll on investor confidence, which helps explain why Trip.com enjoys a price-to-earnings (P/E) ratio of 15.1 times while Fosun Tourism’s ratio is only about 11 times.

The pent-up demand unleashed after China lifted travel restrictions early last year fed into a high base effect, making it harder to log impressive growth in the latest period. But the effect of that high bar should fade in the second half, revealing the impact of economic slowdown and weak consumer confidence on industry fundamentals. Investors should closely track the data going forward, to see how the trend of rising demand and falling prices plays out beyond the summer vacation season.

This article is from an unpaid external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.