Thai tourism stocks: sweet spot or basket case?

Normalcy has returned since troops forcibly dislodged thousands of protesters demanding immediate elections on May 19, but an emergency decree remains in place across a third of Thailand and experts say the crackdown failed to fix underlying problems that sparked protests in which 89 people were killed.

In the absence of major political reforms, many expect another crisis to flare again in months ahead. That leaves investors with a tough choice: sell Thai tourism-related shares to stem the pain or nab them at an enticing discount?

HOPES FOR REBOUND

The bulls argue that the market is now too pessimistic and has overextended to the downside. Thailand's tourism and leisure sector .SETTO has lost 4 percent this year, underperforming a 6.2 percent climb in the main index .SETI.

Beaten-down stocks include Erawan Group ERAW.BK, operator of Bangkok's Grand Hyatt (H.N) and the Marriott Courtyard (MAR.N) hotels. Its combined hotel revenue shrank $4.6 million in April and May, reducing its 2010 sales forecast by 20 percent.

Other stocks with exposure to tourism include national carrier Thai Airways THAI.BK and Airports of Thailand AOT.BK, which operates the country's six main airports.

"We believe the sharp fall in passenger movements in the second and third quarters have already been factored in by the market. Their valuations now look attractive," said BNP Paribas-Thanachart analyst Saksid Phadthananarak.

Foreign tourist arrivals are projected at 13 million this year, down from an earlier forecast of 15.5 million.

Siriporn Arunothai, an analyst at Kasikorn Securities in Bangkok, recently 'overweighted' the industry, saying the government's relief measures including tax deductions when buying tour packages and low-interest bank loans to those affected by riots would help turn the industry around.

The brokerage firm gave a "buy" rating to hotel operators Central Plaza Hotel CENT.BK and Minor International

MINT.BK.

LONGER TERM WORRIES

"Problem here is people are now getting scared of this sector more longer term. No one really knows when there'll be attacks and gunfire in the streets again. People see more risk," said Adithep Vanabriksha, a fund manager at Aberdeen Asset Management.

"We could see some peace and quiet for a while and everything looks fine. But who can tell you what will happen in three, four or five months? There are more questions and concerns," said Bangkok-based Adithep, who manages $727 million in Thai assets.

That uncertainty could lead to longer-term changes in regional travel flows, making other countries more attractive.

January-April visitor arrivals in Singapore jumped 20 percent to 3.6 million. Malaysia's new government economic model aims to ensure tourism as a proportion of GDP increases from 7 percent.