Share Price Reflects Excessive Worries
The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. -- Ed.
Earnings for both Hotel Shilla’s DFS domain and its hotel business are consistent with our estimates. There is some negative investor sentiment towards the DFS industry due to stricter regulations on on-site transfer of duty-free cosmetics at in-city DFSs, but the impact on DFS earnings is to be limited. Thus, such concerns appear overly reflected in Hotel Shilla’s current share price.
Firm’s share price reflects excessive worries
We maintain a Buy rating and a TP of W110,000 on Hotel Shilla.
Investor sentiment towards the DFS industry has worsened as of late due to both worsening profitability and stricter regulations on the volume of on-site transfer of duty-free cosmetics at in-city DFSs. However, viewing these worries as being excessive, we see no additional need to trim down our earnings estimates.
As of 4Q21, the portion of domestic and foreign brands among cosmetics sold at domestic DFSs stood at 20:80. As the absolute portion of domestic cosmetics sales (the main victim of the government’s restriction) is not high, the expansion of foreign brand sales should be sufficient to make up for any decline in domestic cosmetics sales. And, given that the margin rate is also high for foreign brands, we see no need for worries towards potential profit figure deterioration.
4Q21 review: Earnings satisfy estimates
Hotel Shilla posted 4Q21 sales of W1.13tn (+34% y-y) and OP of W24.9bn (TTP y-y), with OP meeting our conservative (versus consensus) estimate.
The levels of competition and commission fees among DFS players were similar q-q, and the sales portion divide between larger distributors and small/medium-sized Daigous remained stable at around 50:50. Hotel Shilla’s hotel business stayed in the black, helped by an ongoing rise in domestic travel demand (centering on Jeju Island) despite the government’s suspension of its back-to-normal pandemic rules policy.
DFS sales in January look to have decreased slightly m-m. We attribute the contraction to the effects on Daigous’ activities of a strengthening in quarantine measures by the Chinese government in the run-up to the Winter Olympics. However, as actual demand at Korean DFSs remains intact, a significant release of deferred sales should be seen after the conclusion of the Olympics.