Momentum to Rise towards 2H22
The author is an analyst of NH Investment & Securities. He can be reached at jooyh@nhqv.com. -- Ed.
Hotel Shilla’s DFS division has performed sluggishly on a contraction of Daigous activity owing to China’s Winter Olympics and Covid-19-related city lockdowns. We expect the firm to enjoy an earnings recovery from May, when city lockdowns are expected to ease.
Momentum to rise towards 2H22
- We maintain a Buy rating and TP of W110,000 on Hotel Shilla.
- Hotel Shilla underperformed expectations in 1Q22, affected by increased commission fees amid a shrinking of Daigous activity stemming from China’s Winter Olympics and Covid-19-related city lockdowns. In our view, however, little attention should be given to the company’s short-term gains and losses at this stage, as business has yet to normalize. Our TP is based on earnings forecasts for 2023, when operations should normalize. Once air passenger demand rebounds in earnest, it is expected that the firm’s dependence on sales to Daigous will decrease, which should in turn lead to a reduction in commission fees. From 2H22, when the recovery of passenger demand should enter full swing, an uptick in share price momentum is anticipated.
1Q22 review: Margins decline
- Hotel Shilla posted 1Q22 sales of W1.09tn (+51% y-y) and OP of W15.1bn (-43% y-y), with OP falling short of the market projection.
- The DFS division logged 1Q22 sales of W978.5bn (+55% y-y) and OP of W12.7bn (-40% y-y). We mainly attribute the lackluster results to a drop in Daigous activity (which currently accounts for the majority of sales at the division) owing to China’s Winter Olympics and Covid-19-related city lockdowns. While DFS sales in April likely remained similar q-q, a recovery is forecast from May, as city lockdowns should begin easing on the recent decrease in the number of Covid-19 cases in China.
- The hotel & leisure division recorded 1Q22 sales of W115.9bn (+22% y-y) and OP of W2.4bn (TTP y-y). Although 1Q is traditionally an off-season for the hotel industry, robust earnings continued on a significant strengthening of domestic travel demand. Considering that 1Q operating losses were the norm prior to Covid-19, we believe that the hotel & leisure business should now be evaluated more favorably than before the pandemic.