Chinese Socks... and Tourists

Last year, China exported 504 million pairs of socks, 73 million cell phones...and 30 million tourists.

It's true; tourists have become one of the country's leading 'exports'. Wanderlust, it seems, is but one of the many by-products of the flourishing Chinese economy. As Chinese tourism grows, many of the world's leisure companies will enjoy what could be a very, very long boom.

Two years ago, for the first time, outbound Chinese tourists outnumbered their Japanese counterparts. By 2020, the World Tourism Organization predicts Chinese will be taking about 100 million trips a year placing them fourth on the list of the world's most frequent travellers behind the United States, Germany and Japan. And by 2035, the Chinese will likely become the world's leading globetrotters.

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'Behind the forecasts of growth in Chinese tourism,' the New York Times reports, 'are China's booming economy and two crucial moves by the government last fall to placate the growing middle class. Instead of just a restricted pool of residents of Beijing, Shanghai and Guanzhou, residents of about 100 second-tier cities also were allowed to travel abroad. The government also increased the amount of foreign exchange a person may take out of the country, to $6,000 from $2,000.'

'Asia Pacific is now up, up, up and away the world's most dramatic tourism performer,' says hotelasiapacific.com. 'The star performer, of course, is China. In just four short years [although, looking back, they certainly don't seem particularly 'short'], the country's tourism juggernaut has set new records not just for its growth, but also for the breakneck speed of that growth.'

The growing swarms of Chinese travellers are changing the face of tourism worldwide. For starters, many hoteliers have learned to apply Feng Shui concepts to room layouts, to serve 'congee' - a rice porridge on breakfast buffets alongside eggs and bacon, and to avoid placing their Chinese guests on the 'unlucky' fourth floor.

But Chinese tourists are also changing the ECONOMICS of global tourism. 'It is not just the sheer number of potential travellers that is making this group attractive, but also their spending power,' Eurobiz Magazine relates. 'Even before travel restrictions on Chinese citizens were eased, the relatively small numbers of Chinese travellers clocked in as the fourth-largest spending group of travellers in Europe, after the Japanese, Americans and the Russians, according to Global Refund.'

Down in Australia, the Chinese already top the list of big-spending tourists. '[And] all across the Pacific,' the New York Times reports, 'officials are vying to net the elusive, wealthy Chinese tourist, seen as the big-spending successor to the Arab tourists of the 1970's, fuelled by oil dollars, and the brandaholic Japanese shoppers of the 80's and 90's. The Chinese now dominate or account for a large slice of foreign tourism in Hong Kong, Macau, Singapore, Taiwan, Malaysia, Thailand, Vietnam and Indonesia.'

We suspect, therefore, that hotel and leisure companies throughout the Pacific Rim will reap the bulk of the Chinese tourism bounty. Last autumn, Christopher Mayer - our colleague at the US Fleet Street Letter - identified one such company: Orient Express Hotels (NYSE: OEH).

'The company owns a truly remarkable collection of 44 luxury hotels, three distinctive restaurants, five tourist trains and one luxury cruise line,' Chris explained in his initial recommendation. 'I like OEH's global character. It is less dependent on the US consumer, as it caters to the luxury travellers of the world. Whatever may happen in the world, there will always be a wealthy few, and they like to travel.'

Increasingly, those 'wealthy few' are carrying Chinese passports. It would be a stretch, however, to label OEH a pure 'China play', since only about one quarter of the company's revenues derives from the Pacific Rim. But the stock has nearly doubled since Chris' recommendation - a testimony both to Chris' masterful stock picking and to the global tourism boom.

Meanwhile, Shangri-La Asia Ltd (Hong Kong: 69), a much more focused play on Chinese tourism, has gained 'only' 45% since last fall. Shangri-La, which describes itself as 'the largest Asia-based deluxe hotel group in the region,' owns or operates more than 60 hotels throughout the Pacific Rim. Its hotels in China and Hong Kong kick in more than half the company's net operating profit, while its hotels in Singapore, Thailand and the Philippines contribute most of the rest.

To be sure, the Shangri-La share price, at 20 times estimated earnings, reflects much of the company's near-term growth prospects. But we suspect the stock has not yet 'priced in' its prospective earnings of 2035.

Pull up a chair, the Chinese tourism boom might be around for a while.

Eric J. Fry, reporting from midtown Manhattan, for The Daily Reckoning

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