Enjoying Healthy Sales and a Decline in Product Discounts
The author is an analyst of NH Investment & Securities. She can be reached at jy.lee@nhqv.com. -- Ed.
Hotel Shilla’s 4Q20 earnings missed expectations, affected by one-off expenses stemming from a change in lease accounting standards, asset depreciation, and restructuring costs. As of 1Q21, the firm is enjoying healthy sales and a decline in product discounts. Going forward, profitability should further improve, backed by the closing of its IIA Terminal 1 business in February.
As of 1Q21, sales are stable and profitability is gradually improving
We maintain a Buy rating and TP of W105,000 on Hotel Shilla.
This year, Hotel Shilla’s earnings should hit bottom and then gradually stabilize. We note that: 1) DFS sales grew 10% m-m in January on the back of a recovery in Chinese consumption. Despite the rapid rise of Hainan DFSs and the end of DFS inventory sales to overseas buyers (mostly Chinese resellers) via international mail, customer churn has yet to be seen. In addition, Hotel Shilla is working to secure new customers by utilizing the newly introduced multiple delivery system. 2) The average product discount rate is also improving, as competition among domestic DFSs has eased, and individual resellers (offering high profitability) are returning. 3) The firm’s Incheon International Airport (IIA) Terminal 1 business, which has languished in the red, is scheduled to close in February.
4Q20 review: Hit by one-off expenses (change in lease accounting, asset depreciation, and restructuring)
Hotel Shilla announced consolidated 4Q20 sales of W841.9bn (-45% y-y) and an operating loss of W35.2bn (TTL y-y), with both sales and profitability missing expectations.
The DFS division logged sales of W742.3bn (-47% y-y) and an operating loss of W16.7bn (TTL y-y). As well as sales falling short of expectations due to the re-proliferation of Covid-19, one-off expenses were reflected, including W9bn related to a change in lease accounting standards for IIA Terminal 2 rental fees and costs related to sluggishly performing stores. While the commission fee rate has risen to 20% amid efforts by DFS operators to attract small/medium-sized resellers, profitability should improve on an increase in small/medium-sized resellers who receive lower discount rates versus large resellers.
In 4Q20, the hotel division saw sales of W99.6bn (-25% y-y) and an operating loss of W18.5bn (TTL y-y). The Seoul branch performed sluggishly due to hotel reservation restrictions stemming from the implementation of social distancing level 2.5 in the metropolitan area and the reflection of one-off restructuring costs.