The authors are analysts of Shinhan Investment Corp. They can be reached at firstname.lastname@example.org and email@example.com, respectively. -- Ed.
Consolidated operating earnings to swing to a loss of KRW2.3bn in 1Q20
We believe Hotel Shilla’s domestic duty-free sales increased more than 30% YoY in January (vs. Korea’s combined duty-free sales growth of 14.3% YoY), but dropped 35-40% YoY in February due to the COVID-19 outbreak. Duty-free operations at domestic airports and Jeju were likely hit by steeper sales declines vs. relatively less-affected online and Seoul duty-free shops. Overseas duty-free operations (Singapore, Hong Kong) are also struggling from the impact of the outbreak.
Our consolidated operating earnings forecast for 1Q20 is revised down from a profit of KRW19.9bn to a loss of KRW2.3bn (negative swing YoY). By business, domestic downtown duty-free operations and the leisure business should post operating profit of KRW39.5bn and KRW4.2bn, respectively. Meanwhile, operating loss will likely reach KRW20.2bn from domestic airport duty-free shops (no discount offered on rent), KRW9.4bn from Singapore airport duty-free (discount applied to rent), KRW6.8bn from Hong Kong airport duty-free (assumed that discount is offered on rent), and KRW9.5bn from hotel operations. If discounts are offered on rent for duty-free shops at Incheon International Airport, Hotel Shilla may be able to report operating profit on a consolidated basis instead of swinging to a loss in 1Q20.
2020OP forecast at KRW237.3bn (-19.8% YoY) with upturn expected from 2Q20
Duty-free sales could continue to fall through April but will likely improve from May, backed by small-scale Chinese merchant demand deferred from the latter half of April. Individual merchants are likely to return to Korea one step ahead of tourists. Earnings are expected to recover in earnest from 2Q20, with quarterly consolidated operating earnings to turn from a loss of KRW2.3bn (negative swing YoY) in 1Q to profits of KRW55.9bn (-29.4% YoY) in 2Q, KRW99.5bn (+73.2% YoY) in 3Q, and KRW84.2bn (+8.5% YoY) in 4Q. Consolidated operating profit is forecast at KRW237.3bn (-19.8% YoY) for full-year 2020 and KRW385.4bn (+62.4% YoY from the low base of the previous year) for 2021.
Retain BUY and target price of KRW113,000
Our target price for Hotel Shilla is based on the 12-month forward (2Q20-1Q21F) EPS forecast of KRW4,491 and a target PER of 25x. We applied a 38% discount to the 40x PER average recorded in 2012-2016 (period of strong growth in Chinese group tours). Earnings are expected to be weak in February-April due to the COVID-19 outbreak but will likely recover from May on the back of rising sales to small-scale Chinese merchants. We retain our BUY rating on Hotel Shilla.