Chinese authorities are worried about a second wave of the coronavirus after detecting new infections centered around a market in Beijing. While the situation seems to be under control, this isn’t good news for tourism companies that are highly exposed to the pandemic.
Chinese tourism stocks are under pressure from strict government travel restrictions and poor consumer sentiment toward travel. Here are two Chinese tourism companies that may have a hard time surviving a potential second wave of the coronavirus because of their lack of geographic diversification outside of China.
The first is Melco Resorts (NASDAQ:MPEL), an Asia-based casino operator with significant exposure to the struggling Macau market. The second is Trip.com Group (NASDAQ:TCOM), a China-focused travel service provider with plummeting revenue amid the pandemic. Investors should avoid these stocks until the crisis is over.
1. Melco Resorts
Melco Resorts is a casino operator that makes its money from gaming, restaurants, and resort facilities. Melco’s operations are focused in East Asia and the Pacific region, with most of its properties in Macau and Manila, Philippines. The company has a small footprint in Europe through satellite properties in Cyprus, but these only accounted for around 3% of first-quarter revenue.
Macau has grown to become the largest gaming market in the world, taking the crown from Las Vegas in 2007. The special administrative region is the only part of China with legalized gambling, and that means it enjoys a virtual monopoly on the vast Chinese market. However, Macau’s special relationship with mainland China has come back to bite it during the coronavirus crisis, making the stock especially vulnerable to a second wave of the pandemic.
Hong Kong and Guangdong provinces — two major entry points for mainland Chinese visitors to Macau — currently require guests to undergo 14-day quarantines after returning from Macau, which sent the city’s gaming revenue down by 93.2% in May. While these restrictions are expected to ease in the near term, progress is stalled. And a second wave of the coronavirus could worsen the situation.
Macau will also have trouble attracting visitors from Beijing because of a fresh round of travel restrictions imposed on the city due to the new outbreak there.
Melco’s operating revenue fell 41% year-over-year from $1.38 billion to $811.18 million, while adjusted property EBITDA collapsed by 82% to $75 million. The company’s lack of diversification outside of Macau exposes it to extreme risk from the situation in mainland China.
Trip.com is a China-focused travel service provider that specializes in ticketing, reservations, and tours. The company faces significant risk from a second wave of the coronavirus because of its heavy reliance on international travel and lack of diversification outside the mainland Chinese market.
Even though China’s domestic outbreak is relatively controlled, the coronavirus pandemic is accelerating around the world, which means China is unlikely to ease international travel restrictions any time soon. The country maintains a travel ban on almost all foreigners and subjects nationals to 14-day quarantines upon reentry to the country. This is bad news for Trip.com, which relied on international travel for 35-40% of its revenue in the second quarter of last year.
Trip.com reported first-quarter earnings on May 28, and the results show significant weakness in the business. Net revenue fell 42% to 4.7 billion RMB ($669 million), mainly because of a collapse in accommodation reservation revenue, which refers to hotel and resort bookings — a segment highly exposed to the slowdown in international travel. Management expects the collapse to worsen in the second quarter, and has guided for a 67-77% decline in revenue.
The second wave of the coronavirus in China (and the travel restrictions on Beijing) could send Trip’s revenue to the lower end of management’s guidance range, leading to downside in the stock price.
Tourism contributes to around 10.4% of global GDP, and the industry will eventually bounce back. But not all tourism companies are created equal. Melco Resorts and Trip.com will probably have a harder time surviving the downturn because of their non-diversified business models and heavy exposure to coronavirus-related challenges in the economy.