As the mining investment boom continues to taper off in Australia, economists and the investment community have pondered what sectors will next stoke the fires of economic growth for our country.
One of the most powerful thematics that the Australian economy will benefit from in the coming years, and likely decades, is the rise of the Chinese middle class. McKinsey and Co estimates that by 2022, 550m people in China will be considered middle class, enough to make them the third most populous country in the world. As its citizens become wealthier, their disposable incomes grow and consumerism takes hold, certain industries will prosper.
Figure 1. 2012 actual and 2022 projected Chinese urban household wealth
Source: McKinsey and Co
For Australia, the main benefactors will be businesses with exposure to inbound tourism, agriculture and food, as well as some select consumer goods. Some companies have already seen incredible share price performance resulting from the influence of increasing Chinese wealth, such as A2 Milk, Blackmore’s and BWX. One company which we believe is in the right place at the right time to reap the benefits of this ongoing thematic is Mantra, Australia’s largest hotel and resort operator.
Figure 2. China Average Yearly Wages
Source: MOHRSS China, Trading Economics
The main reasons we are attracted to Mantra are:
- Its large east coast presence: Queensland, New South Wales and Victoria are the company’s largest exposures, and also the most popular cities for Chinese tourists. It’s most recent acquisition of the Art Series Group adds 5 new properties in Melbourne, and one in Sydney and Brisbane.
Figure 3. Mantra Properties
Source: Company website
- A strong balance sheet with significant capacity to fund acquisitions in a sector has been consolidating for some time. The top 10 operators in the sector have 2x the market share they did in 2004, suggesting the potential for more pricing power looking forward. Following its most recent acquisition FY18 ND/E is forecast to be approximately 29% and net debt to EBITDA of 1.3x.
- Good momentum in its resorts business, which whilst being popular with international tourists has been particularly strong with the local population. Mantra’s resort exposure is well placed to benefit from the steady pickup in baby-boomer retirees who will likely be drawn to their offerings.
- Highly leveraged to inbound tourism growth; from 2006-2016, Chinese tourist numbers grew 285%, India grew 220% and Malaysia was up 160%. With forecasts suggesting mid to high single digit growth to 2020, Mantra is well placed to benefit.
Figure 4. Overseas Arrivals to December 2016
- Good stable of core brands with different value offerings, including Mantra, BreakFree and Peppers. Mantra and BreakFree are more focused on capital cities with hotels and apartments while Peppers is primarily located at tourist hotspots outside of CBD locations. The company has also made a number of acquisitions in recent years, expanding its footprint into Indonesia and Hawaii.
While we believe that the strong underlying thematics described will drive profit growth at Mantra for years to come, some headwinds could potentially present themselves in the near term:
- A higher Australian dollar acts as a deterrent for inbound tourists as well as a making international travel cheaper for Australian residents. Our view remains that the AUD should weaken given some irrational exuberance in metals markets which is currently supporting it.
- Some weakness in Perth and Darwin, while also recovering from a lag in booking in the Brisbane CBD market. Like many tourism operators in the Brisbane and Gold-Coast markets, Mantra suffered a downturn in bookings after the highly publicized and tragic accident at Dreamworld. While the issues in its less exposed markets may take some more time to turnaround, some positive trends are appearing in the Brisbane market, suggesting it may return to a more favourable environment soon. The 2018 Commonwealth Games at the Gold Coast, which is expected to attract over 100,000 international visitors, should also be a significant tailwind for its Brisbane properties.
Mantra is set to report its full year earnings to the market at the end of August. Given the weaker operating environment in some of its markets, mainly Brisbane and Perth, it could see profit come in towards the lower end of management’s previous guidance. This may present an opportunity to acquire shares at a sharp price in a company feeling the pinch of short-term issues yet still well placed to benefit from longer term trends.