The Multi-Trillion Dollar Asian Boom

Hidden in Plain Sight

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The race is on.

Countries around Asia, including Hong Kong, are

pouring billions into upgrading and expanding their

airports in anticipation of a massive boom in air travel.

China has invested an estimated US$11.5 billion

into building the new Daxing International Airport,

which is set to double the passenger flight capacity for the city of Beijing. The move to expand is aggressive, given that Beijing’s current airport, the Beijing Capital International Airport, is already ranked as the second largest in the world by passengers handled.

Down south, Hong Kong is looking to invest an

estimated HK$141.5 billion (US$18 billion) for

a whole host of airport improvements, including

a terminal expansion, a 25-hectare Sky City development, and crucially, a third runway to increase its flight capacity.

Meanwhile, Singapore has its own big plans. Having

just added Terminal 4 in late 2017, the Lion City is looking to up the ante by adding Terminal 5, which is expected to nearly double its existing capacity from 82 million to over 150 million.

Elsewhere, governments from Indonesia to Malaysia and Thailand are earmarking billions of dollars for

similar efforts to expand capacity and upgrade their airport terminals. Again, the magnitude of capacity expansion being planned is significant, with 50% to 100% increases being the norm.As we look across the Asian continent, the theme is

clear. Airport capacity expansion is a key priority.

A scale the world has not seenThe capacity increases in the airports above may come across as aggressive at first glance. But the prize that the Asian governments are eyeing is a travel scale that the world has yet to see. The travel market in Asia is huge, but it’s set to grow even bigger. According to the World Travel

and Tourism Council, the Northeast Asia travel and

tourism market, which includes China, generated

economic activity worth US$2.1 trillion in 2018. Southeast Asia’s market pulls in US$373 billion. More growth is expected, according to SATS (SGX:

S58), a Singaporean airline catering firm. Asia Pacific is expected to add 1.8 billion travellers in the two

decades between 2014 and 2034.

The Multi-Trillion Dollar Asian Boom

Hidden in Plain Sight

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More importantly, the rise in passenger volume is largely expected to be driven by intra-Asia travel, which is projected to contribute 62% of the expected growth. China, India and Indonesia are expected to

contribute the bulk of the increases.

The expected growth in the years ahead provides fertile ground for investors to look for companies that

may benefit from the massive expansion trend. With that in mind, we have prepared a Special Report

that highlights three interesting, Asia-based companies

that could benefit from the impending travel boom.

SATS (SGX: S58): Connecting Asia

(and serving them meals, too) Singapore-listed SATS (SGX: S58) has

straightforward purpose: “Feeding and connecting

Asia.”

The company fulfils its purpose through two main business segments:

• Food Solutions, which offers in-flight catering for a number of airlines, as well as institutional

catering services. For the fiscal year ended 31 March 2019 (FY18/19), the Food Solutions business contributed 54%% of SATS’ total revenue of S$1.83 billion.

• Gateway Services contributed 46% of SATS’s total sales in FY18/19, and mainly

provides airport terminal services including

aviation security, baggage handling, and airfreight handling.

Aviation-related activity is vital for SATS’s business, accounting for 86% of SATS’s total revenue in FY18/19. Soaring air travel passenger numbers around Asia is a tailwind for the company.

Home-ground advantageLet’s start with Singapore, SATS’s home market. The company holds a dominant position in Singapore’s Changi Airport, handling around 80% of the scheduled flights out of the airport, and serving about 50 of the scheduled 68 airlines. As mentioned earlier, there are plans for Changi Airport to nearly double its passenger capacity by 2030. In FY18/19, 82% of SATS’s revenue came from Singapore.

Outside of the Lion City, SATS is also a leader. In fact, the company is the largest player in the US$6 billion Asia Pacific (APAC) in-flight catering services market, with an estimated share of around 12% to 13% (including associates). The APAC market is more fragmented compared to other mature markets, and

SATS’s management believes that the APAC market will consolidate as airlines in the region divest their

non-core operations. With SATS as the APAC market leader, management believes that the company can play the role of consolidator.

Asia Pacific will grow by an extra 1.8 billion passengers by 2034.

Majority of the growth comes from:

Intra-Asia traffic will account

for 62% of all traffic to, from

and within Asia in 2034.

China: +63.7%

India: +275%

Indonesia: +159%

Rapid growth in Passenger VolumesGrowth trends of passengers volumes in key markets

Millions

Source: IATA; Boeing CMO

50

100

150

200

250

300

350

400

600

800

1,000

1,200 China

US

India

UK

IndonesiaJapanBrazilSpainGermanyFranceItaly 80

100

120

140

160

180

200

220 IndonesiaJapanBrazilSpain

Germany

France

Italy

2014 2034

2014 2034

Source: SATS’s SGX Corporate Day presentation

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We think that consolidation will work in SATS’s favour, allowing the company to scale up, drive higher productivity, and crucially, expand its APAC network. SATS ended FY18/19 with a network of joint ventures and associates in 60 airports across 13 countries. This vast network allows it to negotiate better prices

with suppliers and to provide end-to-end services

to its customers. We believe that SATS can further

strengthen its leading position in the APAC region if it manages to grow its network.

Cash falling from the skyConsolidation requires cash, and that is where

SATS shines, too. The company has been adept at generating cash flow, and it ended fiscal 2019’s fourth quarter with S$349.9 million in cash and just S$95.7 million in debt. The airline caterer has earmarked S$1 billion in capital expenditure and

investments for the next three years, with more than 50% of the sum expected to go towards mergers and acquisitions. To support the higher investments,

SATS is expected to increase its debt.

Year SATS operating cash flow (S$, million)

SATS free cash flow (S$, million)

FY14/15 236.4 175.1

FY15/16 273.1 221.9

FY16/17 308.9 223.4

FY17/18 245.5 152.7

FY18/19 295.7 215.1

Source: S&P Global Market Intelligence

Please keep your seat belts fastenedThere are of course risks related to SATS. An

important risk is the company’s current reliance on Singapore’s status as an air-travel hub, and the status is not within SATS’s control.Customer concentration is another key risk. In FY18/19, 46% of the company’s revenue came from just one customer, Singapore Airlines (SGX: C6L).And given SATS’s heightened focus on driving growth through acquisitions, indigestion of acquired

companies is another key risk to watch. Finally, the popularity of low-cost airlines has been on the rise globally. The rise could reduce the amount of in-flight food served, which could in turn affect SATS. However, the company has been striking up partnerships with low-cost carriers in Asia, which

gives us some confidence that SATS will find new ways to serve low-cost carriers.

Ctrip (NASDAQ: CTRP): China’s

favourite online travel agent Another travel-related stock in Asia that we’re watching is Ctrip (NASDAQ: CTRP), which is listed in the US. It was founded in 1999 and headquartered in Shanghai, China.

Today, Ctrip is one of the big players in online travel bookings with a portfolio of online travel brands such

as Skyscanner, Qunar, Trip.com, and MakeMyTrip.com. In fact, the company is the world’s second-largest online travel agent (OTA) after Booking Holdings (NASDAQ: BKNG) in terms of gross merchandise value, which measures the total value of services sold

through a company’s platform. Within China, Ctrip occupies 60% of the country’s online travel market.Ctrip provides over 90 million registered members with comprehensive travel-related services

including hotel reservations, flight ticketing, package tours, corporate travel management, train

ticket, and dining reservations. The company has five business segments:

• Accommodation reservation, which offers

hotel and hostel reservations for travellers

across different countries, promises lower

prices for its customers. The segment’s revenue in 2018 was RMB 11.6 billion, representing 37.2% of Ctrip’s total revenue of RMB 31.1 billion for the year.

• Transportation ticketing, which offers

reservation of transportation services, including

but not limited to, major flight booking website Skyscanner. Transportation ticketing revenue for 2018 was RMB 12.9 billion, making up 41.6% of the company’s total revenue.

• Packaged-tour, as its name suggests, offers

comprehensive bundled package-tour products.

The segment’s top line of RMB 3.8 billion in 2018 accounted for 12.1% of Ctrip’s total revenue during the year.

• Corporate travel was the smallest segment

in 2018, pulling in just RMB 981 million in revenue, or 3.2% of the total pie. It provides travel arrangement services for corporations.

• Other businesses, where Ctrip houses its online

advertising services. It brought in RMB 1.8 billion in revenue in 2018, or about 5.9% of the company’s total revenue during the year.

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According to McKinsey & Company, Chinese tourists made 131 million trips overseas in 2017 and spent US$250 billion in total. McKinsey expects these figures to grow to 160 million and US$315 billion by 2020. With only 8.7% of Chinese citizens owning a passport currently, outbound travel from China has exceptional room for growth – fitting the overall trend of growth in air travel passengers

from within Asia that we’ve discussed earlier in this report – and Ctrip could benefit. Already, Ctrip has seen robust growth. Revenue has increased nearly sixfold from RMB 5.4 billion in 2013 to RMB 31.0 billion in 2018, according to S&P Global Market Intelligence. Over the same period, free cash flow was positive in all but one year, and it jumped by more than 250% from RMB 1.8 billion to RMB 6.4 billion.

There are, of course, risks related to Ctrip:

• Although Ctrip has managed to produce a strong

stream of free cash flow, we’re watching the company’s profit. Operating income has been erratic, coming in negative in 2014 and 2016, according to S&P Global Market Intelligence.

• The Chinese government has cracked down

on the company’s practice of automatically opting customers in to high-margin options

– which it dubs “value-added services” such

as expensive travel insurance. Travellers

may also see such practices as being in direct contrast to Ctrip’s stated “customer-centric” approach. Meanwhile, much of the recent

decline in Ctrip’s profit margins can be blamed on the change in its approach to

value-added services.

• Another line to watch is Ctrip’s shares outstanding, which have almost doubled

between 2014 and 2018. Historically, the company has used its shares as a currency to fund acquisitions, and we should expect this

practice to continue into the future.

Samsonite (SEHK: 1910):

Packing for Asia’s Travel GrowthOne travel-related stock in Asia that will likely benefit from this tourism boom is Hong Kong-listed luggage

maker Samsonite International SA (SEHK: 1910).Anyone in the world who has ever travelled abroad has most likely used a Samsonite product. And on

the world’s most populous continent, this is even more true. Samsonite is the world’s largest luggage company and is over 100 years old, originally founded in Denver, Colorado, in the US. However, lured by the potential of the Asian travel market, it decided to list

its shares in Hong Kong in 2011.What is perhaps less recognized is the sheer scale of Samsonite’s brands across different price points. The company owns the eponymous Samsonite as well as American Tourister and Tumi, along with a host of

other brands including Hartmann, High Sierra, and

Lipault. It also possesses an increasing online presence via its bags retailer, eBags.The company generated net sales of US$3.8 billion in 2018 and breaks down its business into four key areas/brands:

• Samsonite – Its eponymous label has been a recognisable brand for all travellers and is

by far the largest contributor to its top line, generating a total net sales amount of US$1.7 billion in 2018. It can be seen as a mid- to high-end brand.

• Tumi – This brand sits within the higher/luxury end of Samsonite’s overall portfolio and was in fact an acquisition (Samsonite bought Tumi for

US$1.8 billion in 2016). It has already started to contribute meaningfully to Samsonite’s overall business with US$762.1 million in net sales in 2018 – an increase of 12.4% compared to 2017 (in constant currency terms).

• American Tourister – This is Samsonite’s mass-market brand, with affordable price points to

match. It contributed US$667.8 million to total net sales in 2018. This was the fastest-growing portion of the business (net sales in percentage

terms) in 2018, up 16.5% year-on-year.• Others – This includes the rest of Samsonite’s

portfolio, where brands such as Speck,

Hartmann, High Sierra and eBags reside. Overall, it generated US$654.5 million in net sales in 2018, up 11.9% over the previous year.

Online presenceWhat’s been more impressive is that Samsonite has been actively building up its online presence and going direct to the consumer. Although it has wholesale and

direct-to-consumer channels, the former still made up

nearly two-thirds of its total net sales in 2018.

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With contributions from Johnny Chan and Tim Phillips

Disclosure: Motley Fool analysts Ser Jing Chong and Hui Chin Leong own shares in SATS Ltd.

However this is changing as Samsonite bulks up its

e-commerce presence.

This is already starting to have an impact. Direct-to-consumer net sales increased from 33.4% of net sales in 2017 to 35.9% in 2018.

Set for growthWith a forecast two-thirds of the global middle

class set to reside in Asia by 2030, Samsonite is one company that could benefit hugely from the megatrend in tourism. The potential numbers speak for

themselves, with China leading the way – around 25 million Chinese tourists travelled to ASEAN in 2018 alone, never mind the rest of the world.

As long as there’s a desire globally to travel, Samsonite’s products will be in demand.