China Tourism Report Q3 2008

Hong Kong Arrivals Surge Bearing out our view that Hong Kong will become an increasingly important tourist destination in terms of its role as a gateway to mainland China, tourist arrivals growth increased by 9.4% y-o-y in the first two months of the year. Tourist arrivals totalled 4.87 in January and March, with strong growth in arrivals from within the region. In particular, arrivals from Australasia surged 26.2%, to 47,628, closely followed by South Korea (up 50.1%) and North Asia (20.7%). Of particular note was a 46.9% increase in arrivals from Russia, a testament both to Russia's growing consumer spending power and to an aggressive marketing campaign to promote China as a tourist destination for Russians.

Hong Kong can expect visitor arrivals to boom in 2008, with a significant proportion of visitors to the August 2008 Beijing Olympics transiting through or stopping off in Hong Kong. This is particularly the case for arrivals from Taiwan, with Hong Kong one of the main routes from Taiwan to the Chinese mainland. We expect China as a whole to experience strong tourist arrivals growth in 2008, and are forecasting growth of 10%. Hong Kong should experience similar levels of growth, in company with regions close to Beijing which will benefit from overspill tourism.

Ticket Prices Frozen Concerned that the global economic slowdown may discourage visitor arrivals to China, government departments have launched a campaign to keep admission prices low at major tourism sites. Eight departments, under the co-ordination of the National Development and Reform Commission, have agreed to standardise admission fees across the country. In cases where fees are deemed too high, these will be lowered. The initiative is planned to last for a year, with the aim of encouraging more Olympics-related tourists to travel to major sites. The plan is also intended to boost domestic tourism, having been launched immediately before the May Day holiday, traditionally a major source of domestic tourism revenue.

China Eastern Loses Flights China Eastern, the country's third largest airline, warned in April 2008 that it may post financial losses in the quarter, following the loss of some of its scheduled flights. From early May, two of its routes in the southern province of Yunnan have been cancelled by the government, after a prolonged labour dispute by the company's pilots led to persistent delays and flight cancellations. It currently runs six Yunnan routes, which have been cut by between two and six daily.

The company has warned that this route reduction could lead to losses of CNY405mn in 2008, as a result of loss of sales revenue. China Eastern posted a Q108 profit of CNY210.8mn, following a loss of CNY510.9mn in Q107, with Q108 sales revenue totalling CNY10.6bn, a rise of 14.0% y-o-y. The firm is implementing a far-reaching expansion programme, which has seen it increase its fleet to 223 aircraft in 2007. However, the labour dispute may damage China Eastern's market potential, with its Yunnan routes being distributed among its four main rivals, including dominant carrier Air China.