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Investors hoping to cash in on a boom in Chinese travel after nearly three years of pandemic lockdowns are shifting into airports, hotels and duty-free operators and away from airlines subject to fluctuating fuel prices and more intense competition.

The first wave of bullishness as China began abandoning its zero-COVID policy in December lifted airline stocks and online travel agencies like Trip.com Group Ltd (9961.HK).

But with global airlines being slow to add capacity to connect China with the U.S. and Europe and Chinese travellers preferring trips closer to home, a new set of stocks is benefiting.

Thailand has re-emerged as a favourite destination for Chinese travellers, and also for investors.

"We were active earlier in terms of domestic travel, lodging space and airports, where we've done quite well," said Elaine Tse, portfolio manager at Allspring Global Investments. Tse said the firm has locked in some profits from those bets.

"We are optimistic on a rebound in regional and international travel and continue to get exposure through airports and airplane leasing."

Shares of airports, such as Airport of Bangkok (AOT.BK) and Shanghai International Airport (600009.SS) have underperformed the big three Chinese airlines Air China (601111.SS), China Eastern (600115.SS) and China Southern (600029.SS) since the start of November, leaving room for further gains in the former.

Investors say airline stocks are not only expensive, but their earnings tend to be volatile and susceptible to swings in oil prices.

Shares of Air China, China Eastern and China Southern have gained between 7% to 17% in the past four months, with Air China and China Southern trading above their 5-year average forward earnings, according to Refinitiv data.

In contrast, China Tourism Group Duty Free Corp (601888.SS) trades at 28 times its forward earnings, well below a 5-year average.

In the battle for Chinese travelers, local airlines are expected to fare better than regional airlines such as Qantas (QAN.AX), Singapore Airlines (SIAL.SI) and Cathay Pacific (0293.HK), mainly because Chinese airlines kept more widebody planes and staff ready.

China expects inbound and outbound tourist numbers in 2023 to reach more than 90 million, recovering to 31.5% of pre-pandemic levels. All three Chinese airlines are expected to swing to profit in 2023 after reporting big losses last year, according to Refinitiv data.

Analysts expect Chinese airlines will see profits peak next year as international traffic makes a fuller rebound.

"I think we need to be patient and wait for the earnings to kick in to drive the valuations down," said Vey-Sern Ling, senior equity advisor at Union Bancaire Privee.

Hilde Jenssen, head of fundamental equities at Nordea Asset Management, has bought some consumer discretionary companies exposed to tourism such as duty-free operators in hopes of capturing secondary effects of the reopening.

While investors were betting at the start of the year that sky-high Chinese household savings, which jumped to 17.8 trillion yuan ($2.61 trillion) last year, will lead to a post-pandemic splurge, Chinese consumers have so far been cautious.

Jenssen said earnings from some consumer discretionary companies showed they were restocking inventories in anticipation of strong demand.

"It might not be sort of the big bang that everybody was hoping for at the beginning of the year ... (but) there is definitely some pent up demand." (Reuters)