Duty-free Sales Expected to Continue to Grow
The authors are analysts of Shinhan Investment Corp. They can be reached at jwsung79@shinhan.com and hanny.lee@shinhan.com, respectively. -- Ed.
MoM uptrend in domestic duty-free sales continues in May
Combined sales of domestic duty-free operators came in at USD1.4bn (+0.3% MoM) for May, marking a new monthly high for the year and beating expectations for a slight MoM drop. Duty-free sales to foreigners topped forecasts at USD1.33bn (+67.1% YoY, +0.5% MoM). For June, domestic duty-free sales are expected to come in on par with or just shy of May figures.
We now believe Hotel Shilla's duty-free sales at downtown stores increased around 15-20% MoM in April and continued upward by an estimated 5-10% MoM in May, contrary to our previous forecast for a slight decline for the month. Our forecasts also point toward a dip in June, but actual numbers could once again beat expectations and continue on the MoM uptrend.
2Q21 consolidated OP forecast revised up to KRW45.1bn (TB YoY)
We now expect Hotel Shilla to post 14.5% QoQ growth in domestic downtown duty-free sales for 2Q21, exceeding our previous forecast on strong demand from small-scale Chinese merchants. Accordingly, we revise up our operating profit forecast for the quarter from KRW36.5bn to KRW45.1bn. The market consensus currently stands at KRW30bn. Operating earnings by business are estimated at +KRW38.1bn from domestic downtown duty-frees hops, +KRW6.4bn from domestic airport duty-free shops, +KRW2.9bn from overseas airport duty-free shops, and –KRW1.1bn from the hotel/leisure business. The hotel business (Shilla Seoul, Shilla Jeju, and Shilla Stay hotels) is expected to report faster-than-anticipated earnings improvement. We may need to revise up our operating profit forecast even further (by KRW5bn-10bn) if domestic duty-free sales once again exceed expectations in June.
Retain BUY for a target price of KRW125,000
We maintain our target price at KRW125,000, with Hotel Shilla's enterprise value estimated at KRW4.9tr based on 2022F EBITDA. Our target multiple of 17x applied to the valuation of the duty-free business represents a 25% discount to the past six-year EV/EBITDA average recorded during the period of rapid growth in Chinese inbound travelers. Duty-free sales to foreigners have already recovered to all-time high levels on just the demand from small-scale Chinese merchants. We expect to see steep growth in Hotel Shilla’s earnings in the long run, with outbound traffic to rise alongside vaccination rates and easing travel restrictions to lead to the inflow of Chinese travelers. Despite the recent rally, an actual upturn in in/outbound traffic should add further upside to Hotel Shilla's share price going forward.