Fast-growing investment theme has outpaced GDP growth for over a decade

For those watching China closely, a fast-growing investment theme has persistently outpaced GDP growth for over a decade, and is showing no sign of abating.

Since 2006, total Chinese tourism spending has grown at a whopping 18% per year on average – outpacing average GDP growth of 9%. At the same time, the total number of trips made by Chinese tourists has steadily increased by an average of 12% per year.

The Chinese tourism boom will have surprising legs

Surprisingly, the Chinese tourism boom is only just getting warmed up. Even today, less than 1 out of every 10 Chinese citizens hold travel passports, versus 4 out of every 10 in the United States. Looking ahead, we see three major factors driving the Chinese tourism boom forward.

Demand for leisure travel will be driven by the rise of the Chinese middle class

First, the demand for leisure travel will continue to grow significantly due to the inexorable rise of the middle class in China, alongside increasing urbanization, growing disposable income, and a shift in consumer behaviour towards leisure consumption.

Today, about 10% of the Chinese population has an annual disposable income in excess of US$10,000, but this is expected to grow to more than 30% of the population by 2030.

The propensity for leisure travel consumption will also rise with the increasing shift to an urban consumption lifestyle and stronger consumer confidence.

Chinese urban dwellers are more likely to travel for leisure, and China is still urbanizing steadily. By 2020, China’s urbanization rate will increase to 60% from 30.5% in 1996.

In addition, consumer confidence is growing with rising disposable income, and Chinese consumers are increasingly willing to increase present consumption by saving less for the future or borrowing from future earnings.

This is evident from a moderately lower household savings rate and growing trends in the consumer credit space, as the disposable income per capita of Chinese urban residents grew from about 6,000 RMB to 33,000 RMB from year 2000 to 2016.

Supply-side factors also form important tailwinds for the continued growth in Chinese tourism

Second, the tourism boom will also enjoy firm tailwinds from supply-side factors.

We continue to see significant investments and improvements in China’s tourism and hospitality related infrastructure, including airports, highspeed rail, hotels, theme parks and tourist attractions. These capital investments significantly improve the convenience and cost of travel, and also drive domestic trips to tourist destinations in Greater China.

To illustrate, as the number of airports in China increased from 142 to 229 from year 2006 to 2017, the number of serviced destinations rose significantly from 74 to 214. Chinese airports handled about 1.2 billion passengers in 2017, up 13% from last year.

Legislation in China and other countries will be increasingly supportive

Third, the Chinese tourism boom will be supported by increasingly favourable legislation in China and other countries.

The Chinese government has repeatedly indicated its intention to implement a paid annual leave system. This will increase the annual leisure time available to the average Chinese person, which is currently 25% to 35% below that of developed countries. A meaningful portion of an increase in national leisure time ahead will likely be devoted to tourism.

Chinese tourists will also enjoy greater access to foreign destinations, as an increasing number of countries open up to Chinese passport holders in terms of lower visa requirements, more convenient processes, and longer validity for visas.

Important to recognize that the behavior and preferences of Chinese tourists are changing

While the Chinese tourism theme has significant legs going forward, it is important for investors to recognize that the behavior and preferences of Chinese tourists are shifting.

Instead of package tours, which are more focused on shopping and traditional sightseeing, Chinese tourists now increasingly prefer independent travel focused on experiences, entertainment, and cultural content. There is also a greater sensitivity to prices, and a preference for online channels which enables the direct purchases of air tickets and hotels.

Online travel agencies, such as Ctrip.com, are poised to benefit

In China, online travel agencies already command a larger share of the booking market over traditional agencies, and this edge will continue to grow.

One beneficiary of the China tourism theme will be Ctrip.com (CTRP), which is the market leader in the Chinese online travel agency space. Our equity analysts have a Strong Buy rating on Ctrip.com, and expects the gross merchandise volume of the Chinese online travel market to show a healthy 24% YoY growth to RMB650bn in 2018E. We also see Ctrip.com as well positioned to benefit from this growth, given that it is the largest online travel agency (OTA) in China with a wide range of quality products and services.

Other beneficiaries include companies with significant exposure to domestic tourism, including Melco Intl (200 HK) and MGM China Holdings (2282 HK)

Other beneficiaries of this theme include companies with significant exposure to domestic tourism, such as gaming resorts in Macau that have been building up their mass segment businesses and hotel capacity.

This includes Melco International (200 HK) which is opening Morpheus in City Of Dreams, and MGM China Holdings (2282 HK) with the new MGM Cotai. In addition to tailwinds from rising leisure travel consumption, these companies will also benefit from continuing infrastructure improvements in Macau, including the opening of the HK-Zhuhai-Macau Bridge in mid-2018.

Contact us today for more information on how to capitalise on the Chinese tourism boom.