THE 8.6% drop in tourist arrivals in Malaysia to 6.48 million for the first quarter of this year from 7.09 million in the previous corresponding period appears to have taken a toll on the hospitality and retail sectors.

The decline was due to a sharp drop in the number of tourists from Singapore, China, Indonesia and Thailand.

Nevertheless, Tourism Malaysia is sticking to its original target, at least for now. “We have not reviewed our 2015 target. Our target is still 29.4 million tourist arrivals and RM89 billion in receipts,” director-general Datuk Mirza Mohammad Taiyab tells The Edge.

In the last two years, Malaysia missed its arrivals targets. In 2013, despite a last-minute downward revision to 26 million arrivals from 26.8 million, the country managed to welcome only 25.73 million tourists. Last year, during Visit Malaysia Year, it registered 27.44 million arrivals, short of the targeted 28 million.

Mirza attributes the poor performance from January to March 2015 to last year’s triple airline tragedies. “The AirAsia QZ8501 incident had a negative impact on tourists from Indonesia, especially those who had been flying AirAsia,” he says, adding that arrivals from the Philippines and Vietnam also declined due to the incident.

Floods that hit parts of Malaysia in December 2014 and January 2015 also contributed to the lower arrivals from Singapore, Thailand, Brunei and Indonesia.

Recent efforts by countries in the region to attract tourists resulted in greater choices for Chinese, Thais, Indonesians and Singaporeans, says Mirza.

“Japan, too, has joined in to woo tourists from these markets by liberalising its visa requirements and carrying out more promotions. Winter promotions by South Korea and Japan attracted a lot of travellers from Asean and other countries. The popularity of the two countries with Asean tourists has grown substantially,” he says, adding that this is yet another factor that contributed to the less-than-expected number of arrivals in the first 90 days of the year.

According to Mirza, the decline is not unique to Malaysia; Singapore and Vietnam are experiencing the same situation due to the depreciation of currencies such as the euro, yen, krona and rouble. He says a weaker ringgit is not the only factor that draws tourists to Malaysia, as travel decisions are influenced by many other factors.

In the case of travel and tour packages, he says the currency depreciation should continue long enough to influence the prices of tours in the long run.

Not surprisingly, the drop in arrivals has affected hotel occupancies as well as the retail business in Malaysia. Last year, foreigners contributed RM72 billion in tourism receipts. Of this, accommodation and shopping each made up about a third of the foreign spend. This means that based on the expected RM89 billion in tourism receipts this year, RM29 billion should come from tourist spend on accommodation and another RM29 billion on their shopping.

Malaysian Association of Hotel Owners executive director Shaharuddin M Saaid tells The Edge that the average occupancy of hotels in Malaysia in the first quarter of the year was between 45% and 50%, a decline from 55% to 70% in the previous corresponding period.

According to him, expectations in the second quarter remain bleak as there are no major promotional activities or events of significant impact being organised by the Ministry of Tourism and Culture.

On whether hotels are reducing rates to attract guests, Shaharuddin says, “So far, there have been no reports of undercutting of rates, but it may come soon. Competition among hoteliers is expected to intensify should occupancy continue to be low, and we see increased room inventory from new hotels.”

If the results announced by some of the listed entities are anything to go by, hotels have not fared well from Jan 1 to March 31 compared with a year ago. But it must be noted that hotel guests comprise both locals and foreigners.

Shangri-La Hotels (M) Bhd (fundamental: 1.85; valuation: 1.1) saw its group revenue in the first quarter ended March 31 fall 12% to

RM120.66 million from RM137 million a year ago. “The overall financial results for the first quarter of 2015 reflected the reduced operating performance across all of the group’s hotels and resorts due to a significant decrease in occupancy in a weak business environment,” the company said in an announcement to Bursa Malaysia.

For example, Shangri-La Hotel Kuala Lumpur recorded an occupancy rate of 68% compared with 80% in the previous corresponding period, Rasa Ria Resort’s rate was  66%, from 85% a year ago, and Rasa Sayang Resort’s 61%, from 74%.

Shangri-La Hotels says given the overall market conditions, it expects the hotel business to remain challenging this year.

Sunway Real Estate Investment Trust (fundamental: 1.0; valuation: 0.15) saw revenue at Sunway Resort Hotel & Spa and Pyramid Tower Hotel decline 19.2% and 29.4% respectively in the third quarter ended March 31, 2015. The trust attributed the performance to “softer business and consumer sentiment ahead of GST”. Sunway Hotel Seberang Jaya’s revenue was down 10% on the back of an exceptionally soft market demand during the quarter as well as competition from newly opened hotels.

It appears that the impact of lower tourist spend on shopping is noticeable in the current quarter. Bukit Bintang KLCC Tourism Association immediate past president Joyce Yap says in the first quarter, retailers in the KLCC and Bukit Bintang tourist belt saw a small growth. She attributes this to locals shopping ahead of the implementation of GST on April 1, which helped cushion the impact of the decline in shopping spend by foreign tourists.

However, Yap adds that sales in April dipped between 20% and 40%, owing to fewer arrivals as well as fewer locals shopping post-GST.

Mirza says arrivals will improve in the second quarter as he expects the launch of MyFest 2015 earlier this year to begin to have a positive effect. The markets targeted by Tourism Malaysia this year include Japan, South Korea, eastern Russia, Taiwan and China for medium-haul tourists and Asean for short-haul visitors.

Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on June 1 - 7, 2015.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.