Fosun Tourism Takes Off Globally, But Gets Grounded in China

Revenue from the Club Med operator’s resort operations quadrupled in the first quarter, as many countries reopened their borders to tourists

Key Takeaways:

• Club Med operator Fosun Tourism reported a fourfold increase in revenue from its resort operations in the first quarter despite a resurgence of the Covid-19 Omicron variant
• Company is expected to return to profitability this year, with valuations that look competitive with other major global tourism stocks

By Doug Young

Omicron, what Omicron?

That’s the key takeaway coming from a decidedly upbeat first-quarter update released late on Wednesday by Fosun Tourism Group (1992.HK), China’s top resort operator whose core asset is the Club Med resort chain.

The report is chock-a-bloc with data that reflect two major themes. The first shows the world outside China is on a strong upward trajectory, rapidly approaching pre-pandemic levels in terms of business. But the road is proving much bumpier in Fosun’s home China market, which enjoyed strong business last year as the country kept its pandemic under control but is struggling now as it tries to tame the unruly Covid-19 Omicron variant.

Luckily for Fosun Tourism, just a quarter of its tourism business comes from the China market, with most of the rest from Europe and North America. That’s quite important here since most of the markets where Club Med operates outside of China have reopened for tourists, meaning most of those properties have partially or full reopened.

Investors welcomed the report by bidding up Fosun Travel’s stock as much as 4% in early Thursday trade in Hong Kong, taking it above its year-ago level. The stock started this year with a 30% rally as it looked like Omicron was passing and the end of the pandemic might be in sight. It later gave back most of the gains from a February peak, though its current levels are still around double the lows it once fell to during the first year of the pandemic.

With the company forecast to return to profitability this year, we can start to analyze how its stock trades on a price-to-earnings (P/E) basis as its situation stabilizes. On that basis, the company trades at a P/E of 28 based on analyst forecasts for this year, with the figure dropping to 14 based on strong profit growth seen into 2023. By comparison, leading global hotel operator Marriott (MAR.US) trades at higher P/E ratios of 35 based on this year’s profit forecast and 27 for 2023; and casino resort operator Las Vegas Sands (LVS.US) trades at 160 and 17 over that period.

Those figures show Fosun is becoming an increasingly attractive choice for global investors, able to compete with the big worldwide players on the strength of its Club Med holdings and also from its strong presence in the fast-growing China market.

All that said, we’ll jump into some of the highlights contained in Fosun Tourism’s first-quarter business update. We’ll begin with the biggest-picture figure that shows revenue from the company’s core resorts and tourist destinations business quadrupled to 4.2 billion yuan ($655 million) in the first three months of the year from 1 billion yuan in the year-ago period.

“Due to the gradual lifting of travel restrictions in various countries, the group witnessed recovery of its businesses outside Mainland China,” Fosun Travel said in the update. “For the first quarter of 2022…the unaudited net profit of Club Med was significantly turned around as compared to the first quarter of 2021 and recovered to a majority of the level of the same period of 2019, despite the impact of the Omicron strain on Europe, the Middle East and Africa and the Americas market in January 2022.”

Club Med shines

The Club Med brand was the superstar for the period, posting a global average occupancy rate of 62.1% – up a full 25 percentage points from the year-ago quarter, though still down 8.4 percentage points from pre-pandemic levels in 2019. The average daily bed rate of 1,725 yuan for the quarter was even stronger, up 61.5% from a year earlier and – more significantly – up 19.5% from pre-pandemic levels in 2019.

The key takeaway from the Club Med figures seems to be that people still aren’t traveling quite as much as they were pre-pandemic. But when they do travel, they seem willing to spend more than they were before the pandemic, probably reflecting the type of “revenge spending” that many said might appear as the pandemic eased.

Then there’s China, which is host to eight of Club Med’s 64 resorts worldwide, and is also home to Fosun Tourism’s massive Atlantis Sanya resort that accounts for more than 15% of its revenue from resort operations.

Fosun Tourism said that Atlantis Sanya’s business volume was actually up 44.3% during the months of January and February combined, which is always a busy travel time due to the Lunar New Year holiday. But then the mega-resort’s business plunged 87% in March, as a growing number of cities locked down residents and strongly discouraged travel with the Omicron variant’s arrival in China. As a result, Atlantis Sanya’s total business volume fell 1.6% in the first quarter year-on-year to 379.6 million yuan.

Omicron seems to have peaked in some parts of China by now, including Shanghai where most city residents have been locked down for weeks. But it’s far from clear the situation will remain under control, and future disruptions are almost inevitable due to China’s “zero-Covid” policy that requires large-scale lockdowns and other travel restrictions each time even the smallest outbreak occurs.

Despite the question marks hanging over its China business, Fosun Tourism does look well-positioned to rebound this year due to its highly international portfolio. That same portfolio was an Achilles heel last year, when many countries were still banning tourists from coming. The company still managed to post 8.5% growth for its resort operations last year, but remained deeply in the red for a second consecutive year with a 2.7 billion yuan loss.

We’ll close with a quick mention of Thomas Cook, the 180-year-old British travel service that collapsed dramatically in 2019 and was relaunched in September 2020 after being acquired by Fosun Tourism.

In the roughly year-and-a-half since that launch, a new China-focused Thomas Cook app recorded 1.6 million downloads and posted first-quarter business volume of 115 million yuan. The relaunched version of a Thomas Cook UK website was a bit stronger, with business volume up nine-fold year-on-year to 360 million yuan for the quarter. Of those two, the Thomas Cook UK appears to have the potential to become a major contributor for Fosun Tourism, similar to Club Med, thanks to its well-established name and earlier strong reputation.

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