Variant view: Japan's coming tourism boom
Japan's border is opening up and the weak yen will help, too. Estimated reading time: 12 minutes
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The Japanese Yen just hit 143 to the US Dollar - an extraordinary drop from the 110 level seen in September last year.
While a weakening currency has been negative for Japanese fixed-income assets, there’s also cause for optimism. In particular, I believe that Japan’s tourism industry is in a sweet spot right now, benefitting from both a border reopening and an exceptionally cheap currency.
Since COVID-19 broke out in January 2020, the number of foreign tourist arrivals to Japan has fallen to almost zero.
What happened in Japan is that the government introduced the following restrictions:
In January 2020, Japan had its first COVID-19 case, a man who had travelled to Wuhan in China. Two weeks later, Japan banned the entry of foreign nationals from China’s Hubei province. A few weeks later, the government introduced quarantine requirements.
By August 2020, the government expanded the travel ban to 159 countries.
In July 2020, to alleviate the ailing travel industry, the Japanese government launched the “Go Travel” campaign, which subsidised up to 50% of domestic travel costs.
In December 2020, Japan implemented a complete ban on entry for all non-residents of the country.
In November 2021, the country closed its borders to international students and business travellers.
In January 2022, the government reduced the isolation period for travellers to Japan to just seven days.
In February 2022, a new quota for foreign visitors was set to 3,500 per day, effectively opening up the border. This quota was later raised to 10,000 in April and then to 20,000 in June.
In March 2022, Japan allowed foreign nationals to enter the country, but only for purposes other than tourism.
In June 2022, Japan began allowing group tours from 98 countries and regions. The government removed quarantine requirements for these tour groups. On the negative side, the government still required tour guides to accompany visitors to ensure that the foreign visitors followed mask-wearing and hand-sanitising protocols.
2. Consensus view
Most sell-side analysts are cautious about the potential for Japanese tourism to recover. They believe that the situation remains “dire” and “uncertain” and that tourism will take a long time to recover. Few of them mention the weakness of the Japanese Yen.
Here are a few recent comments, for example:
“The government announced earlier today that it will raise the daily inbound visitor cap from 20,000 to 50,000 from 7 September… This is another step towards resuming normal inbound but still far from pre-pandemic conditions…. at this stage, we do not know when tourists will come back to Japan and how fast or how slow the Japanese customer will come back to their store. We expect a steady recovery but this could be delayed by a new Covid-19 variant.” - June Kato, CLSA
“Given China’s Zero-Covid policy, Japan’s inbound tourism revenues are likely to pick up only slowly through H2. We see a mild strengthening in JPY on a 12-month horizon as energy prices ease, Japan slowly re-opens to international travel, the economy enjoys a post-Covid bounce and US rate hike fever cools” - Colin Asher, Mizuho
“The recovery of the Asian markets will be slower and our biggest concern is China” - Shinya Kurosawa, CEO of JTB Global Marketing & Travel
“Accommodation facilities may fall into a negative spiral where they are unable to make new investments in preparation for travel demand recovery as they are pressed to repay their debts" - Kotaro Toriumi, independent aviation / travel analyst
"There are still some restrictions on inbound tourists, and 'normal' tourist travel into Japan is still not yet possible… Airlines are cautious when adding frequencies, especially with the real demand still very much uncertain." - Dennis Lau, Cirium
3. Variant view
I believe that Japan is on the cusp of a tourism boom.
Starting today - 7 September 2022 - the government will allow tourists from all countries to enter Japan without joining a guided tour. Pre-arrival PCR tests have also been dropped for fully vaccinated travellers. The daily arrival quota increased from 20,000 to 50,000. This quota can be compared to a daily average of about 100,000 experienced before COVID-19. In other words, tourism could, in theory, reach 50% of the pre-pandemic level as long as the demand is there.
The only downside is that trips to Japan must be purchased through travel agencies. Those requirements add another JPY 10,000-15,000 (US$70-106) to the cost of visiting Japan for one week trip. And visitors still need to get visas before they can enter the country.
There is no guarantee that these new measures will lead to a full recovery in Japanese tourism. But they are steps in the right direction. And eventually, I believe that Japan will open up its border completely.
Japan’s Prime Minister Fumio Kishida is signalling that the border measures will eventually match those of other G7 countries - most of which have no restrictions at all:
Kishida is pursuing a “living with COVID” policy of weathering the surge without imposing restrictions on businesses or mobility.
Kishida believes the Omicron variant is mild: “Our fight against the virus is not easy, but we should not be too afraid and instead take into consideration the [mild] characteristics of the omicron variant.”
Kishida has said that he will consider easing restrictions further, aiming to put border measures on par with other G7 countries. In his own words: “We will continue relaxing these measures gradually… We hope to announce something soon based on the quarantine setup and the situation with infections.”
Will COVID-19 become less of a worry over time? Well, countries that have “let the virus rip” have all seen their excess mortality decrease to ~zero. Several studies have shown a build-up of natural immunity post-infection. The same will presumably happen to Japan now that COVID-19 policies have become lax.
And then, finally, we have the weakening of the Japanese Yen. A cheap currency will make it attractive to visit Japan as an overseas tourist. The JPY/USD exchange rate has depreciated from 110 to 143, a drop of 23%:
Since Japan’s inflation rate remains low, the country’s real effective exchange rate has reached multi-decade lows, suggesting an exceptionally cheap currency.
The Economist’s Big Mac index can be used to gauge the purchasing power of a currency. Today, a Big Mac costs JPY 390, which can be compared to US$5.15 in the United States. In other words, a hamburger costs half as much in Japan as in the United States.
In The Economist’s own words:
“For the euro, then, the two theories of currency valuation look aligned. Not so for the yen, which is more than 40% undervalued against the dollar on both Big Mac indices. (Book that flight to Tokyo, American burger-lovers.) The yen has become more undervalued since January, both because the dollar has surged and because inflation is much higher in America.”
To make the comparison more relevant to tourism, I’ve tried to compare typical costs for tourists to the US vs Tokyo across several dimensions:
Mariott 5-star hotel: US$253 in Tokyo vs US$358 in NYC
Flight ticket from NYC: US$1,229 vs US$1,881 to Seoul, South Korea
1km taxi: US$2.9 vs US$1.6 in NYC
Theme park tickets: US$63 to Tokyo Disneyland vs US$118 for Disney World Orlando
Cinema ticket: US$8.5 in Tokyo vs US$16.0 in NYC
A pint of beer: US$3.2 in Tokyo vs US$5.0 in NYC
Cappucino: US$3.0 in Tokyo vs US$4.5 in NYC
For most items except taxis, prices in Tokyo are around ~40% lower than in NYC.
And there’s plenty of evidence of pent-up demand for travel to Japan. For example, Japan is currently the top travel destination for Singaporeans, according to a May 2022 survey by YouGov.
A big question mark is how long the Chinese border will remain closed. Does the Chinese Communist Party want outbound tourism to drain its FX reserves and expose its population to foreign influences?
In 2019, Chinese visitors to Japan were almost 10 million, around 30% of the total. So in the absence of a Chinese border reopening, a full recovery may be some time off.
4. The investable universe of stocks
In the name of investor education, here is a list of tourism-related stocks in Japan, starting with travel agencies, hospitality REITs, transport companies, leisure facilities and retailers.
4.1. Travel agencies
The largest listed travel agency in Japan is Tokyo-based HIS, which has offices across 69 countries. The company was formed in 1980, focusing on arranging discount travel overseas. It’s unclear what percentage of HIS’s business is focused on inbound travel. Besides packaged tourist trips, it also organises conferences, events, weddings, and cruise trips. In addition, HIS owns several hotels across Tokyo, Osaka, Fukuoka and Nagasaki and the Huis Ten Bosch theme park in Nagasaki, which it is now selling to PAG Asia Capital. Pre-COVID, HIS used to make an operating income of JPY 18 billion, compared to a current enterprise value of JPY 344 billion.
Hanatour Japan is another travel agency connected to Korea’s Hanatour Service. It arranges inbound travel to Japan from South Korea and China, and to a lesser extent from Southeast Asia, Europe and the United States. Hanatour has been barely profitable in the past, even before COVID-19.
4.2. Hospitality REITs and hotels
Japan Hotel REIT is the largest and most blue-chip of any Japanese hospitality REIT. The company was formed in 2005 and merged with Nippon Hotel Fund in 2012 to become the largest in the sector. Its assets are run by international hotel groups such as Holiday Inn, Sheraton, Marriott, Ibis and Hilton. The hotels target holiday and business travellers from overseas, with only 60% of guests being from within Japan. Some share dilution in the past, though it has remained cash-flow positive through COVID. In fiscal 2019, the company had a distribution per unit of JPY 3,690, which against today’s share price of JPY 67,700 represents a dividend yield of 5.5%.
Invincible Investment is another hospitality REIT formed by the merger of TGR Investment and LCP Investment. It has a portfolio of 86 hotels with 15,600 rooms, 47 residential properties and one shopping mall. The hotels are a mix of limited service, full-service and resort hotels. Most assets are in the Greater Tokyo area, and most operate under the MyStays brand. The ultimate parent is Japan’s Softbank Group. The company has been acquisitive, with persistent dilution in the share count. Against pre-pandemic distribution per unit of JPY 3,381, the dividend yield is 8.0%.
Hoshino Resorts is the first of the Japanese hospitality REITs to include traditional wooden Ryokans (Japanese-style bed & breakfast hotels), but today the portfolio is much broader. Hoshino Resorts Group rents most of the REIT’s assets, but the hotel operators also include IHG Ana and Hyatt. The hotels are primarily in rural areas of Japan across Kyushu, Okinawa, Chubu, Kinki, Kanto, Hokuriku and Hokkaido. A list of Hoshino Resorts assets can be found here. Against the pre-pandemic distribution per unit of JPY 26,162, the dividend yield is approximately 4.0%.
Mori Trust Hotel REIT owns five luxury hotels with 1,469 rooms, most of which are in central Tokyo. These assets are operated mainly by international brands such as Shangri-La, Hilton and Courtyard by Marriott. These properties were developed by sponsor Mori Trust, which then injected them into the REIT. There is a large pipeline of new hospitality projects across central Japan that the REIT may eventually purchase. Against the pre-pandemic distribution per unit of JPY 6782, the dividend yield is approximately 5.3%.
Ichigo Hotel REIT is a hospitality REIT managed by sponsor Ichigo Inc. Ichigo was founded by American hedge fund manager Scott Callon, previously head of equities at Morgan Stanley. He took control of Ichigo during the 2008 financial crisis and became its CEO. Ichigo Hotel REIT now owns 23 lodging-focused hotels in the major cities of Japan, such as Tokyo, Yokohama, Osaka and Fukuoka. At the same time, many hotels are business-oriented rather than resorts, implying less reliance on inbound tourism from China. In fiscal 2020, the REIT had a distribution per unit of JPY 9,025, which against today’s share price of JPY 95,600 represents a dividend yield of 9.4%. You can find more information about Ichigo Hotel REIT in this previous Asian Century Stocks write-up.
Ooedo Onsen REIT owns 13 onsen hot spring and spa-related facilities across Japan. The assets are distributed across the islands of Honshu and Shikoku. You can find more details about the portfolio here. In fiscal 2019, the REIT had a distribution per unit of JPY 1,970, which against today’s share price of JPY 66,100 would represent a dividend yield of 3.0%.
4.3. Transport companies
Japan Air Terminal operates Haneda Airport through the 51%-owned Tokyo International Air Terminal. Haneda Airport is one of the two main airports in Tokyo and focuses on domestic travel, whereas the larger Narita is more of an international airport. It has an extensive duty-free operation with a 31% market share across Japan (not only Haneda). It also does in-flight catering, serving both Haneda and Narita airports. The company has always suffered from low margins, but against peak 2019 earnings, the stock trades at an EV/EBIT of 30.3x.
ANA (All Nippon Airways) is the largest airline in Japan, with a 39% market share. It operates a fleet of 214 planes, with services to 104 destinations. The airline’s enterprise value has risen since the pandemic, and against 2019 earnings, the stock trades at an EV/EBIT of 11.7x. Japan Airlines is the second-largest airline in Japan, with a 33% market share. It operates a fleet of 154 planes, with services to 92 destinations. Like with ANA, the company’s enterprise value rose significantly during COVID-19 and now trades at 8.4x pre-pandemic EBIT.
Japan’s railway monopoly was split up into five companies in the late 1980s and then privatised. Today, four of them are listed: Central Japan Railway Company (“JR Central”), East Japan Railway Company (“JR East”), West Japan Railway Company (“JR West”) and Kyushu Railway. While the Japanese railways hold significant debt, lenders are supportive, and their borrowing costs are low. Of the four, JR West and JR Central have greater exposure to the high-speed Shinkansen lines. But JR Central is facing significant capex in the next five years due to the construction of the Chuo Shinkansen Line. While Kyushu Railway is more of a commuter operation, it has greater tourism exposure and a significant real estate leasing business around its railway stations. The P/E ratios against FY2019 earnings are 7.2x for JR Central, 9.0x for JR East, 12.5x for JR West and 9.0x for JR Kyushu. I wrote about Kyushu Railway in a previous Asian Century Stocks write-up here.
4.4. Leisure facilities
Oriental Land is Japan’s leading theme park operator. Its flagship asset is the Tokyo Disney Resort, which includes the Tokyo Disneyland and Tokyo DisneySea. The company also operates several hotels around Tokyo Disneyland. The company has plans to expand both Disneyland and DisneySea in the coming years. The stock trades at a high P/E multiple of 73.3x 2019 actuals.
Fuji Kyuko (“Fujikyu”) operates the Tenjo-Yama Park Mt Kachi Kachi Ropeway, the Fuji-Q Highland amusement parks, several hotels, golf courses, ski resorts, campgrounds, etc. It also owns the Fujikyuko railway and several long-distance bus routes. It also trades at a high P/E multiple of 88.0x 2019 actuals.
Round One operates indoor leisure facilities, including bowling alleys, arcade games, karaoke bars and billiard facilities. They also have a sports-centred offering called Sports Challenge, with battling cages, basketball, tennis, volleyball, driving ranges, etc. It’s unclear how much tourism contributed to earnings pre-COVID. The stock trades at a P/E of 26.3x pre-pandemic earnings.
Pan Pacific is Japan’s leading discount retailer and is particularly popular with tourists to Japan. It runs discount stores under the brand name Don Quijote in Japan and Don Don Donki overseas. Many of the items represent excess inventory purchased from other retailers. But there are also high-quality staples that customers come back for and offer surprisingly good value. A lot of value was added by the acquisition of competitor Nagasakiya. The next avenue of growth will come from the Southeast Asian subsidiary. The company has done well during COVID-19 and trades at a 2025e P/E ratio of 19.3x. I’ve written about the company before here.
Yamada Holdings is the largest electronics retailer in Japan with a ~30% market share and 12,640 stores and show homes. The products sold include consumer electronics and furniture. It operates stores under the Yamada and Best Denki brand names. The stock has done well during COVID, causing a temporary increase in earnings. But against pre-pandemic earnings, it trades at 10.9x P/E.
BIC Camera is another electronics retailer that sells appliances, watches and a few other categories of goods. Audio/visual products have been a key draw for tourists. The company has a partnership with China’s GOME, which sells BIC Camera-sourced products in China. The stock trades at 13.5x pre-pandemic net profit.
September tourist arrival statistics due in early October
A further increase in the daily quota (yet to be announced)
Removal of visa & package travel requirements (yet to be announced)
Thank you for reading!
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Excellent, useful, and timely summary. As an owner of a ski property in Hakuba I'm disappointed in the slow reopening (recent step only allows hotel/pension stays), but am hopeful things will ease by December! With the JPY weakness property prices are extremely cheap in Japan and there are no barriers to ownership. I built a 5 bedroom, 5 bathroom ski home for under USD 600k at current exchange rates which seems completely the wrong price when it's still possible to borrow yen for 1.5%
Informative, thematic bird's eye view. Really enjoyed it!