Normalization of Business Operations Still Awaits
The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. -- Ed.
Weighed upon by commission fee hikes, Hotel Shilla’s OP for 3Q21 arrived sluggish. Although sales normalization represents a more important factor than short-term profit, it will be necessary to keep an eye upon intensifying competition among DFS players.
Concerns towards mediation fee hikes still in play
Although maintaining a Buy rating, we lower our TP on Hotel Shilla from W115,000 to W110,000 in consideration of a downward adjustment to 2023F NP (excluding minority interests).
We expect Hotel Shilla’s DFS sales to begin rebounding in earnest in 2H22, returning to pre-pandemic levels in 2023. We caution against being overly worried towards short-term profit, noting that normalization of business operations still awaits. Rather, we believe that main share price determinant will be the pace of passenger demand recovery in the wake of the Korean government’s announcement of its ‘With Corona’ policy. However, should the issue of commission fee increases linger amid intensifying competition, sector valuations are inevitably to deteriorate—accordingly, the matter requires monitoring going forward.
3Q21 review: Sales sound, but margins narrow sharply
Hotel Shilla announced consolidated 3Q21 sales of W968.7bn (+10% y-y) and OP of W20.9bn (TTP y-y). Sales proved sound, but OP missed consensus by 50% with higher commission fees becoming a central issue.
The DFS division posted 3Q21 sales of W857.6bn (+11% y-y) and OP of W20bn (TTP y-y). Sales at the downtown locations upped 19% y-y, whereas airport location sales fell 36% y-y due to the withdrawal from Incheon International Airport T1. Sales flow was in line with our forecasts, and both the sales portion for small/mid-sized resellers and item category sales portions did not change significantly q-q. However, margins were heavily dragged upon by expanded marketing expenses due to intensifying competition among DFS players—we estimate that the commission rate surged around 5%p q-q.
The hotel division recorded sales of W111.1bn (+2% y-y) and OP of W900mn (TTP y-y). Despite the government’s implementation of stricter (Stage 4) social distancing rules, there was a turn to the black thanks to average room rate (ADR) growth in response due to strong domestic travel demand.