A coronavirus that originated in China is spreading quickly, with more than 900 cases reported worldwide and at least 26 deaths as of 24 January.

Though most are in mainland China, cases have been confirmed in Hong Kong, Macau, Thailand, Taiwan, Vietnam, South Korea, Singapore, Japan, Australia, and the US, disrupting travel and forcing officials to quarantine cities – more than 30 million people in China are under travel restrictions.

Among the companies we cover, those in the travel and tourism industries are the most likely to be affected by the outbreak: airlines and airports, casinos, resorts, online travel agencies. Wynn Macau’s chief executive didn’t rule out closing casinos if the outbreak worsens, for example.

To gauge the effect of this contagion on our coverage, we compare it to the 2003 outbreak of SARS, a similar coronavirus that originated in China and killed nearly 800 people.

Since SARS did not have a long-term effect on the financials of the companies we covered at the time, we believe this most recent outbreak is likely to lead to only short-term risk. 

Undervalued opportunities for investors include:

  • Trip.com
  • Melco Resorts
  • MGM China
  • Wynn Macau

The current coronavirus appears to be less deadly than SARS, though we can’t rule out the possibility of a mutation. Although the Chinese government has taken steps to combat the virus earlier this time than it did with SARS, mobility in China is greater than before, especially with high-speed railways and the continued growth in air travel.

Looking back at the effect of SARS on the travel industry, we think this coronavirus could lead to a sharp, but short, shock to air travel demand, resulting in traffic declines for airlines and airports over the next few months.

Routes to and from Wuhan, where the virus originated, will be hit the hardest. Among the three largest carriers, China Southern Airlines is most exposed to the Wuhan civil aviation market, followed by China Eastern and Air China.

On a company level, though, the Wuhan market is only a small portion of China Southern’s business, around 5 per cent of the airline’s passenger-carrying capacity. However, given the public fear that the coronavirus has already spread to other regions in China and other countries, we expect to see a wider effect.

Trip's SARS experience

With SARS, the number of airline tickets sold through Trip.com was down 36 per cent sequentially in second-quarter 2003 amid the outbreak to 70,000 but spiked to 180,000 the following quarter.

Revenue at Trip.com was down 42 per cent sequentially to CNY 34 million in second-quarter 2003 and up 196 per cent sequentially in the third quarter to CNY 58 million. Operating loss in second-quarter 2003 was CNY 855,000, but it swung back to an operating profit of CNY 27 million with a margin of 46 per cent in the third quarter (representing a record profit and margin at that time). We think the sharp rebound was due to pent-up demand and Ctrip still being at the early stage of growth.

Room nights in second-quarter 2003 were down 43 per cent sequentially to 280,000, but quickly rebounded to 750,000 in the third quarter.

Trip.com was able to achieve positive net income in second-quarter 2003 due to: 1) The compensation of its customer-service representatives, a significant portion of the cost of services, was linked to the number of transactions completed by them and 2) Trip.com received subsidies from the government, handed to companies affected by SARS, leading to an increase in other income of CNY 4.1 million in 2003.

Should the outbreak of this current coronavirus become as serious as SARS, we would expect operating profit to decline substantially in a quarter and rebound once the outbreak is under control due to pent-up demand. What we think is different today, is that Trip.com is more mature, which could lead to a smaller rebound.

During SARS, SJM Holdings was the only major casino operator in Macau. While it was not listed at the time, it said that the number of gamblers dropped by 30 per cent in April 2003, and betting volumes also decreased.

According to DICJ, SJM’s gaming revenue was up 68 per cent year over year in 2003. Quarterly gaming revenue is not available publicly, but the annual gaming revenue increase shows the short-term nature of the SARS outbreak.

What is different now is that the gaming industry is a lot more mature, thus we expect any recovery to be much smaller in percentage terms. Also, Melco Resorts reported that 38 per cent of adjusted EBITDA came from its operations in the Philippines in third-quarter 2019, so it should be more insulated from the outbreak than its Macau peers.