Which Bursa sector will benefit from China’s eventual reopening?

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Retail REITs, hospitality REITs, consumer products and travel and tourism sectors are on the cards to benefit from the reopening of China’s international border

by IFAST RESEARCH TEAM

MALAYSIA is a country that is located in the equatorial region, and has a tropical rainforest climate, which is hot and humid throughout the year. Being a multicultural country, Malaysia is rich with colonial architecture, stunning rainforests and beaches, contemporary skyscrapers, and a unique landscape covered in tea plantations. As such, Malaysia is one of the top destinations for millions of tourists from all around the world, especially during the winter seasons, when Malaysia successfully attracts international tourists to escape the cold weather.

The tourism sector plays an ever-important role in Malaysia’s economy, contributing 15.9% of the total GDP for the year 2019 while generating billions of dollars in revenues for the economy. Not to mention that it also created millions of job opportunities for the local market. The tourism industry employed 3.52 million people in 2021. In addition, the industry is also growing rapidly, with increasing tourist receipts each year (see Figure 2). However, the Covid-19 pandemic has dampened the secular growth of the industry, as the nation closed its international border for nearly two years in its battle to keep the pandemic under control, which caused both tourist arrivals and total expenditure to take a huge hit.

The China Factor

After two years, Malaysia finally reopened its international borders on April 1, 2022, welcoming millions of inbound foreign tourists. However, total tourist arrivals in Malaysia after nine months of reopening international borders were still lower than the 2020 levels, as some major contributing factors lagged behind. China has been one of the major sources of Malaysia’s annual inbound tourists, with an increasing share of tourists arriving each year (figure 3).

Given that China implemented its “zero- Covid” policy, a strict policy that included extreme measures such as strict lockdowns to contain the Covid pandemic but forced factories and ports to be shut for long periods. Not to mention that international borders were closed, preventing individuals from entering or exiting the nation. As such, tourist arrivals from China have been lacklustre.

However, China eventually has to lift its international border restrictions. The best-case scenario is sometime during next year, 2023. Thus, we would like to highlight some sectors that investors can consider to position themselves to capture the gains from China’s eventual reopening.

Retail REITs

Retail real estate investment trusts (REITs) command the greatest weight in the Bursa REIT Index. Retail REITs, which mainly consist of shopping malls, went through a rough time during the movement control order period in 2020 and 2021. For the first half of 2022, overall retail space in shopping complexes had a 75.7% occupancy rate, which is down from 79.9% in the first half of 2018. Therefore, with the eventual reopening of China’s international border, we believe that the retail Malaysia REITs (M-REITs), especially the prime shopping malls, could record a better performance with no further concerns from the Covid lockdowns and higher footfall levels in malls due to more inbound tourists from China.

Hospitality REITs

Hospitality REITs, which consist of hotels and resorts, suffered the most during the pandemic outbreak. The average hospitality property occupancy rate of the top five M-REITs in the financial year 2020 (FY20) and FY21 registered at 48% and 31% respectively. After two difficult years of being hit by the unprecedented Covid-19, we think the hospitality sector will gradually recover owing to the relaxation of travel restrictions. For some of the large M-REIT players, they have taken the opportunity to refurbish the facilities amidst the pandemic to be well-prepared for the return of tourists. As such, we believe that higher inbound tourists from China will have a knock-on effect on hospitality REITS.

Consumer Products

Besides, we opine that consumer products will benefit from the reopening of China’s international border. This is because as more inbound travellers enter Malaysia, this will have a positive impact on total expenditure and prompt domestic private consumption. We think that consumer and convenience stores will be a direct beneficiary in such areas. Convenience stores are important in tourism not only because of their accessibility (nearly all are open 24 hours a day), but also because they provide an excellent platform for promoting and selling local tourism products. As such, we think consumer sector, especially the convenience store-related stocks such as 7-Eleven Malaysia Holdings Bhd, MyNews Holdings Bhd and QL Resources Bhd stand to benefit with an increase in tourist arrival.

Travel & Tourism Sector

Without a doubt, the travel and tourism sectors would be the major beneficiaries of the reopening of China’s international border. More specifically, airport services will directly benefit from increased tourist arrivals. This is shown in Figure 4 below, which shows that the Malaysia airport generated a huge chunk of its revenue from international passengers. Thus, more inbound international passengers are to be expected once China lifts its international border restrictions, and this will be beneficial to the travel and tourism sector in Malaysia as Chinese tourists were one of Malaysia’s major sources of tourists.

Key Takeaways

In short, Malaysia’s tourism sector plays a big part in the economy’s growth. However, the tourism sector will continue to struggle to get back to pre-pandemic levels due to the lack of the China factor. Moving forward, the eventual reopening of international border for China will bring positive impact towards Malaysia’s economy. Investors can consider gaining exposure to the sector mentioned above to position themselves for the eventual reopening of China’s international border.