The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
Outbound travel recovery also positive for online duty-free sales
Outbound travelers typically visit downtown duty-free shops or their online stores. Most Koreans traveling abroad tend to make duty-free purchases online, which carry 10-50% higher operating margins vs. offline sales. Upon the upturn in overseas travel, increase in share of duty-free sales to domestic outbound travelers from current 5-10% should thus help to drive faster improvement in operating profit from downtown duty-free shops.
2Q21 consolidated OP forecast revised up to KRW31.7bn (TB YoY)
According to data from the Korea Duty Free Shops Association, MoM growth in domestic downtown duty-free sales has continued every month this year. Downtown duty-free sales improved 20% MoM in February and likely increased by 20-25% MoM in April. Sales in April this year even exceeded April 2019 results (previous high for the month of April), thanks to record sales to small-scale Chinese merchants. Sales in May and June tend to decline vs. April due to weak seasonality. However, sales to foreigners (mostly small-scale Chinese merchants) in 2Q21 (April-June) are likely to rise at a faster rate than previously expected, reaching 19.8% QoQ.
We revise up our consolidated operating profit forecast for Hotel Shilla from KRW25.5bn (similar to consensus estimates) to KRW31.7bn for 2Q21. Earnings could even exceed our higher projections given the absence of market competition and solid sales reported to date. Full-year operating profit is forecast at KRW142.3bn (positive swing YoY) for 2021 and KRW242.5bn (+70.4% YoY) for 2022.
Retain BUY and raise target price to KRW120,000
Earnings forecasts have been revised up for 2021 but are left unchanged for 2022. Hotel Shilla's enterprise value is estimated at KRW4.68tr based on 2022F EBITDA. Our target multiple of 17x applied in the valuation of the company's duty-free business reflects a 25% discount to the past six-year EV/EBITDA average, recorded during the period of rapid growth in Chinese inbound travelers. Small-scale Chinese merchants alone have pushed up monthly sales to foreigners to an all-time high. Upturn in sales to outbound domestic travelers as well as foreigners in general will likely lead to steep earnings improvement in the long-term. At current share price levels, we recommend gradually accumulating shares in Hotel Shilla.