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China International Travel Service (601888 CH ) up MP OP Modern Agency Problem Initiation of Coverage

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China International Travel Service (601888 CH ) up MP OP Modern Agency Problem Initiation of Coverage 21 June 2016 Last Closing: Rmb43.73 Upside: -6.2% Target Price: Rmb41.00 Tourism and Leisure Sector China International Travel Service (601888 CH ) UP MP OP Modern agency problem Initiation of coverage Financial Highlights Y/E 31 Dec 2014 2015 201 6E 201 7E 201 8E Revenue (Rmb m) 19,936 21,292 22,082 21,530 20,512 LT YoY growth (%) 14.3 6.8 3.7 (2.5) (4.7) Neutral BUY Net profit (Rmb m) 1,470 1,506 1,471 1,317 1,224 EPS (Rmb) 1.51 1.54 1.51 1.35 1.25 SELL BUY EPS growth (%) 7.0 2.4 (2.3) (10.5) (7.1) Vs. Consensus (+/ - %) (20.7) (40.4) (50.9) P/E (x) 29.0 28.4 29.0 32.4 34.9 P/B (x) 4.2 3.8 3.5 3.3 3.1 Stock Dividend yield (%) 1.1 1.1 1.1 1.0 0.9 Source: Company, BOCOM Int’l estimates Closing price as of Jun 13, 2016 A new battlefield. We believe the edge of travel agencies is founded on asymmetric Both agency and duty-free information, which is no longer the case in the age of “big data”. Tourist spots and businesses are facing intense airlines can easily reach out to tourists and flexibly adjust the peak-low season pricing competition from Internet giants through their own direct-sales channels, at even higher profit margin. At the same time, Internet giants are stepping in to provide one-stop tourist services, with a far bigger and Expect both market share and stickier tourist/customer base. The established online payment system also facilities margins to be under pressure direct sales channels and helps to protect the interests of both buyers and sellers, reducing the reliance on the middlemen. While we believe travel agencies can still 21%-51% downside risk to the consensus forecast maintain their competitiveness in tour brokerage, given their knowledge in tour design and tourist appetite, we still expect a continuous market share erosion in travel agency business. We expect CITS’ tour-related income, which accounts for 29% of earnings, to peak out in 2016E, and gradually retreat by another 3%/5% YoY in 17E/18E. Stock data 52w High (Rmb) 73.01 No longer exclusive. The company derives 70% of earnings from duty-free shops across 52w Low (Rmb) 41.56 airports, which used to be a monopoly for tax-free tobacco and alcohol. However, we Market cap (Rmbm) 42,691 also see downside risk over the long term, amid potential competition from online Issued shares (m) 976.2378 shopping, especially when these platforms have expanded into direct overseas Avg dai ly vol (m) 2.20 purchases and logistics costs remain low. In addition, customs have allowed the opening 1-mth change (%) 1.7% of duty-free shops in specific free-trade zones or outlets, which will pose direct threat to YTD change (%) -26% the company, in our view. 50d MA (Rmb) 44.42 200d MA (Rmb) 49.87 Hay days are over. On top of market share loss, we expect profit margin compression 14 -day RSI 57.77 amid the competition from more cost-effective online platforms and we expect a more Source: Company data, Bloomberg drastic decline for tour services, as gross margins are thin at only 10% (as low as 5%-6% for pure agency business) to start with. Therefore, we believe the company might not be 1 Year Performance chart SHCOMP 601888.CH able to fully capture the upcoming tourism boom. We notice consensus has only 10% factored in the industry growth but overlooked the company’s earnings risk. We 0% -10% estimate a 2%-10% YoY earnings decline for the company in the next 3 years, putting -20% our forecasts at 21%-51% below consensus estimates. Nevertheless, we expect the -30% counter to maintain a premium valuation, given its market leading position, pending -40% potential restructuring with its parent, CITS Group, although there remains a question of -50% Jun-15 Aug-15 Oct-15 Dec-15 Feb-16 Apr-16 how the resource alignment could reverse the threat from Internet giants, in our view. Source: Company data, Bloomberg We initiate coverage on the company with a Neutral rating, and a target price of Rmb41.00, based on 16x ex-financial assets 17E EV/EBITDA (or 17.5x 17E EV/EBITDA), +1 Alfred Lau, CFA, FRM [email protected] SD above its 5-year average, building in the positive sentiment towards restructuring. Tel: (852) 2977 9235 Download our reports from Bloomberg: BOCM 〈enter 〉 China International Travel Service (601888.CH) Tourism and Leisure Sector 21 June 2016 Figure 1: Gross profit breakdown Figure 2: Gross profit growth and margin Others Overseas Tour 7% Domestic Tour 4% (Rmb m) Tour-related Duty-free GP margin (%) Other Operations 1% Tour related 4,000 -5.3% CAGR 50% Taxable Products Revenue Guided Tour 2% 3,500 2% 40% 3,000 Overseas Visa 7% 2,500 30% Ticket Service 5% -4.2% CAGR 2,000 Other Travel Revenue 4% 1,500 20% 1,000 Duty-free retail 10% 68% 500 0 0% Retail related FY13 FY14 FY15 FY13 FY14 FY15 FY16E FY17E FY18E FY16E FY17E FY18E Source: Company , BOCOM Int’l Source: Company , BOCOM Int’l Figure 3: Rolling EV/EBITDA band 30 25 20 15 10 5 0 12 13 14 15 16 12 13 14 15 16 17 12 13 14 15 16 12 13 14 15 16 - - - - - - - - - - - - - - - - - - - - - Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Source: BOCOM Int’l, Bloomberg Download our reports from Bloomberg: BOCM 〈enter 〉 2 China International Travel Service (601888.CH) Tourism and Leisure Sector 21 June 2016 Company background China International Travel Service (CITS) is one of the largest integrated travel agencies in Mainland China. Apart from conventional inbound/outbound agency business, the company is also engaged in duty-free retail, overseas visa, e-commerce and tourist facilities development. As of December 2015, the company has business partnership with over 1,400 tourism- related corporations globally, over 1,000 branches in Mainland and over 200 duty-free shops across Mainland, Hong Kong, Taiwan, Cambodia, etc. In 2015, the company ranked No. 1 among Mainland tourism service providers for the 12 th consecutive year by “World Brand Lab”. The company is 55.3%-owned by CITS Group Corporation. CITS (601888 CH): Financial Statements Profit & loss ( Rmb m) Cash flow (Rmb m) Year ended 31 Dec 2014 2015 201 6E 201 7E 2018E Year ended 31 Dec 2014 2015 201 6E 201 7E 2018E Tour Services 10,409 10,943 10,943 10,617 10,086 EBITDA 2,291 2,498 2,362 2,132 1,978 Change in working capital (216) (295) (181) (48) (32) Overseas Visa - 784 1,567 1,528 1,452 Interest expenses (6) (6) (7) (7) (7) Other travel revenue 1,859 947 981 1,007 1,015 Tax (502) (562) (624) (545) (488) Duty -free revenue 7,003 8,057 8,057 7,870 7,477 Others - - - - - Taxable Products Reve nue 666 562 534 507 482 CFO 1,567 1,634 1,551 1,533 1,451 Revenue 19,936 21,292 22,082 21,530 20,512 Interest & dividend 119 155 140 160 181 Opex (15,398) (16,347) (17,130) (16,775) (16,044) Capex (450) (140) (325) (335) (346) SG&A (2,345) (2,581) (2,765) (2,798) (2,665) Investment (305) (2,806) - - - Disposal - - - - - Depreciation & amortisation (143) (213) (246) (252) (259) Others (172) (253) - - - Others 0 (0) (0) 0 - CFI (808) (3,044) (185) (175) (165) EBIT 2,05 0 2,150 1,940 1,704 1,543 Issue of new shares 0 - - - - Net finance cost 54 12 133 154 174 Share repurchase - - - - - Others 123 151 176 176 176 Net borrowings (7) 40 - - - Tax (557) (591) (562) (508) (473) Dividend (390) (449) (488) (456) (408) MI (200) (216) (216) (208) (195) Others (146) (199) (65) (62) (59) CFF (5 44) (608) (553) (518) (467) Net profit 1,470 1,506 1,471 1,317 1,224 Change in cash 215 (2,018) 813 839 819 FX (7) (11) - - - Balance sheet (Rmb m) Ending cash 7,289 5,260 6,073 6,913 7,732 Year ended 31 Dec 2014 2015 20 16E 201 7E 2018E Cash 7,289 5,260 6,073 6,913 7,732 Financial ratios Trade receivables 1,237 1,306 1,399 1,410 1,408 Year ended 31 Dec 2014 2015 201 6E 201 7E 2018E Inventory 1,530 1,845 1,924 1,890 1,842 Revenue growth (% YoY) 14.3 6.8 3.7 (2.5) (4.7) Investment & others 312 2,835 2,835 2,835 2,835 EBITDA gr owth (% YoY) 19.8 7.8 (7.5) (10.5) (7.9) Others 556 600 602 574 547 Core profit growth (% YoY) 13.6 2.4 (2.3) (10.5) (7.1) Current assets 10,924 11,846 12,834 13,622 14,363 EBITDA margin (%) 11.0 11.1 9.9 9.1 8.8 PPE 1,615 1,574 1,652 1,735 1,822 Core net margin (%) 7.4 7.1 6.7 6.1 6.0 CIP 147 115 115 115 115 ROE (%) 15.3 14.2 12.6 10.5 9.1 Investment 200 232 232 232 232 ROA (%) 11.0 11.2 9.6 8.0 6.9 Intangible assets / goodwill 910 1,126 1,126 1,126 1,126 Core EPS (Rm b) 1.51 1.54 1.51 1.35 1.25 Others 906 839 839 839 839 BVPS (Rmb) 10.34 11.45 12.46 13.34 14.18 Non -current assets 3,777 3,885 3,964 4,046 4,133 DPS (Rmb 0.46 0.50 0.47 0.42 0.39 Total assets 14,701 15,731 16,797 17,668 18,496 Payout ratio (%) 30.5 32.4 31.0 31.0 31.0 ST borrowings 70 110 110 110 110 EV / EBITDA (x) 16.5 16.2 17.2 18.9 20.1 Trade payables 2,043 1,622 1,641 1,577 1,501 EV / EBITDA (x, ex-financial assets ) 16.3 14.9 15.8 17.3 18.4 Deposit received 745 798 798 762 728 Co re P/E (x) 29.0 28.4 29.0 32.4 34.9 Tax payables 299 328 266 230 215 P/B (x) 4.2 3.8 3.5 3.3 3.1 Others 709 820 794 794 794 Yield (%) 1.1 1.1 1.1 1.0 0.9 Current liabilities 3,867 3,678 3,609 3, 473 3,347 Net gearing/(cash) (%) (71.5) (46.1) (49.0) (52.2) (55.1) LT borrowings - - - - - NOSH (million) 976 976 976 976 976 Others 41 161 162 163 164 Non -current liabilities 41 161 162 163 164 Issued capital 5,786 5,786 5,786 5,786 5,786 Reserve & others 153 285 285 285 285 Retained earnings 4,159 5,110 6,093 6,953 7,769 Shareholders' fu nd 10,098 11,181 12,164 13,025 13,840 MI 695 711 863 1,008 1,145 Total equity 10,793 11,892 13,027 14,033 14,985 Source: Company data, BOCOM Int’l estimates Download our reports from Bloomberg: BOCM 〈enter 〉 3 China International Travel Service (601888.CH)
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