‘A Bloodbath’ – Korean tourism & beauty stocks slump amid talk of Chinese crackdown on group travel

SOUTH KOREA. Korean travel retail, tourism and beauty house stocks took a pounding on Tuesday as investors reacted with alarm to reports that China may restrict the number of visitors to South Korea.

In a story headlined ‘China’s tighter travel regulations spark concerns among businessesYonhap News Agency wrote that the Chinese government has been moving to tighten regulations on cheap tour packages.

It cited comments from state-owned China National Tourism Administration (CNTA), which said it would look into “irrationally” cheap travel packages over the next six months, vowing a crackdown on low-quality programmes. Quoting Korean tourism industry officials, the report said that major Chinese travel booking sites have dropped all-inclusive Korean package deals priced below US$300 over the past few weeks.

Meanwhile, Korea Joongang Daily claimed that the Chinese government has instructed travel agencies to reduce the number of tourists travelling to South Korea by -20% compared to last year.

The news comes at a critical point for South Korea’s travel retail industry as the Government prepares to announce the winners of a number of new downtown licences.

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(Above and below) The Korea Joongang Daily report prompted big sell-offs of key Korean tourism-related stocks on Tuesday
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(Above and below) Chinese customers are crucial to the fortunes of travel retailers such as The Shilla Duty Free

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Chinese visitors are crucial to South Korea’s tourism and travel retail sectors, representing 48.9% of visitors in the first eight months of 2016 and an even higher percentage of duty free sales.

As reported, Chinese arrivals in August climbed by +70.2% year-on-year to 873,771, according to the Korea Tourism Organization. Though the figures are distorted by the 2015 MERS health crisis which ravaged inbound tourism in 2015 (prompting a -32.3% year-on-year fall in arrivals last August), they still represent a +15.2% growth over the previous record August high of  757,683, reached in 2014. For the first eight months of 2016 Chinese arrivals rose by +48.8% year-on-year to 5,608,046.

rsz_korea2It is believed that the Chinese move is a widely-anticipated reaction to South Korea’s decision to deploy the advanced US missile defence programme Thaad by late 2017. That move, announced earlier this year, prompted a furious response from the Chinese government and travel retailers have been fearful since about a backlash against the tourism industry.

The Korea Joongang Daily report cited sources in the Korean Embassy in China, consulates and travel agencies, claiming that several Chinese city and provincial governments had contacted travel agencies in their regions to deliver this directive.

Touted measures to restrict tourism include stopping group tourism promotions, limiting shopping schedules in Korea to one per day, and impose a fine of up to CNY300,000 (US$44,000) if such policies are violated, Korea Joongang Daily reported.

rsz_korea3The Korean stock market reacted with alarm. “It was a bloodbath,” reported Barron’s Asia, noting, “Korea’s tourism plays, duty free shopping malls and cosmetics sellers all tumbled today after local media reported that China may restrict the number of Chinese visitors to Korea.”

Beauty giants Amorepacific and LG Household & Health Care fell -8.7% and -8% respectively; while The Shilla Duty Free parent Hotel Shilla slipped -6.6%, and Shinsegae, a major domestic and duty free retailer, fell -6.02%.

Many questions arise, if the reports turn out to be true. Where will the Chinese travel instead of Korea? Thailand seems in prime spot to benefit, though Guam, Saipan, and hard-pressed Hong Kong and Macau may also benefit. What about the ‘one-shop’ rule in Korea? That seems certain to drive up already steep travel agent commission fees as rival retailers fight for a more selective audience. Profitability in Korean duty free, already under great strain, now faces further pressures.

Footnote: The Moodie Davitt Report Chairman Martin Moodie will be in China and South Korea next week and will bring you reaction from both sides.

Visitor arrivals by gender for August; Source: Korea Tourism Organization
Visitor arrivals by gender for August; Source: Korea Tourism Organization
Accumulative visitor arrivals by gender for first eight months; Source: Korea Tourism Organization
Accumulative visitor arrivals by gender for first eight months; Source: Korea Tourism Organization
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