August 25, 2014

COMPANY UPDATE International Travel Service Corp.

Buy Equity Research preview (3): Project launch peak set for 2015-16; CL-Buy

What's changed Investment Profile In parts 1 and 2 of our Haitang Bay preview series, we analyzed ’s Low High duty-free revenue potential and CITS’ margins in . In this final report Growth Growth of the series, we discuss the potential rise of Haitang Bay as an important Returns * Returns * Multiple Multiple tourist destination over the next three years. Volatility Volatility Percentile 20th40th 60th 80th100th Implications China International Travel Service Corp. (601888.SS) 1) In terms of both major tourist sites and hotel inventory, Sanya’s tourist Asia Pacific Consumer Peer Group Average * Returns = Return on Capital For a complete description of the traffic remains concentrated in the city center and . In contrast, investment profile measures please refer to 90% of hotels in and Haitang Bay are five-star hotels, creating the disclosure section of this document. a high-end tourist base. However, in 2015 and 2016, we estimate Haitang Key data Current Bay’s development will peak, adding 1,500 rooms annually (+47%/+31% Price (Rmb) 37.41 12 month price target (Rmb) 47.00 respectively) based on developers’ announced plans. At this pace, Haitang Market cap (Rmb mn / US$ mn) 36,521.1 / 5,935.6 Bay will increase its annual visitor capacity from 2.18 mn in 2014 to 4.18 Foreign ownership (%) -- mn in 2016, approaching Yalong Bay and Dadonghai. By then, we expect 12/13 12/14E 12/15E 12/16E Haitang Bay’s content as a tourist destination to become much richer than EPS (Rmb) 1.39 1.61 1.91 2.12 Yalong Bay or Sanya Bay, potentially underpinning the long-term growth EPS growth (%) 22.1 15.7 18.1 11.2 EPS (diluted) (Rmb) 1.33 1.61 1.91 2.12 in popularity, length of stay and consumption within the area. 2) We EPS (basic pre-ex) (Rmb) 1.39 1.61 1.91 2.12 P/E (X) 23.5 23.2 19.6 17.7 believe China Duty Free Group’s (CDFG – CITS’ wholly owned subsidiary) P/B (X) 3.5 3.6 3.2 2.9 shopping complex project in Haitang Bay, coupled with popularity of the EV/EBITDA (X) 13.2 13.3 10.7 9.4 Dividend yield (%) 1.2 1.4 1.8 2.2 original Dadonghai store, will drive increased traffic to the area. Haitang ROE (%) 17.7 16.4 17.4 17.3 Bay currently sees c.1.3 mn visitors annually, providing meaningful traffic CROCI (%) 22.5 17.5 18.6 18.0 to CDFG’s new project. Transportation will be a short-term hurdle, but we Price performance chart believe it can be cleared. Once that problem is solved, the project could 44 2,400 grow sales through better supply, area and shopping environment. 42 2,350 40 2,300 Valuation 38 2,250 36 2,200 Our 12-m 2015E EV/GCI vs. CROCI/WACC based TP of Rmb47.0 is unchanged 34 2,150 (1.32x valratio). With a dominant industry position, better growth prospects 32 2,100 than peers and undemanding valuation, we reiterate CL-Buy (26% upside). 30 2,050 Aug-13 Nov-13 Mar-14 Jun-14

Key risks China International Travel Service Corp. (L) Shanghai SE A Share Index (R) Lower-than-expected per capita spending at Haitang Bay; lower-than- expected travel agency earnings. Share price performance (%) 3 month 6 month 12 month Absolute 17.1 1.4 10.5 INVESTMENT LIST MEMBERSHIP Rel. to Shanghai SE A Share Index 5.6 (4.3) 1.9 Asia Pacific Buy List Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/22/2014 close. Asia Pacific Conviction Buy List

Coverage View: Attractive Zhijing Liu +86(21)2401-8943 [email protected] Beijing Gao Hua Securities Company Limited Goldman Sachs does and seeks to do business with companies Xufa Liao, CFA covered in its research reports. As a result, investors should be +86(21)2401-8902 [email protected] Beijing Gao Hua Securities Company Limited aware that the firm may have a conflict of interest that could Zhujing Fang affect the objectivity of this report. Investors should consider +86(21)2401-8949 [email protected] Beijing Gao Hua Securities Company Limited this report as only a single factor in making their investment

decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research August 25, 2014 China International Travel Service Corp. (601888.SS)

China International Travel Service Corp.: Summary Financials

Profit model (Rmb mn) 12/13 12/14E 12/15E 12/16E Balance sheet (Rmb mn) 12/13 12/14E 12/15E 12/16E

Total revenue 17,448.2 19,637.0 21,792.0 23,896.7 Cash & equivalents 7,085.1 7,088.8 7,572.2 8,372.4 Cost of goods sold (13,290.0) (14,798.5) (16,313.3) (17,793.5) Accounts receivable 1,095.9 1,502.3 1,965.7 2,482.9 SG&A (2,452.9) (2,762.4) (2,946.6) (3,287.7) Inventory 1,302.0 1,816.0 2,450.5 2,798.7 R&D ------Other current assets 517.2 620.7 589.7 560.2 Other operating profit/(expense) (18.8) 0.0 0.0 0.0 Total current assets 10,000.3 11,027.7 12,578.1 14,214.2 EBITDA 1,822.5 2,286.8 2,824.0 3,152.3 Net PP&E 1,454.4 1,903.9 2,340.4 2,798.3 Depreciation & amortization (136.0) (210.8) (291.8) (336.8) Net intangibles 965.7 944.5 919.9 892.1 EBIT 1,686.5 2,076.1 2,532.2 2,815.5 Total investments 249.3 371.7 506.4 654.6 Interest income 98.3 106.3 106.3 113.6 Other long-term assets 291.8 150.0 150.0 150.0 Interest expense (1.3) (17.4) (17.4) (17.4) Total assets 12,961.4 14,397.9 16,494.9 18,709.2 Income/(loss) from uncons. subs. 96.8 122.4 134.7 148.2 Others 74.0 72.2 75.8 79.6 Accounts payable 2,397.3 2,432.6 2,905.1 3,412.4 Pretax profits 1,956.9 2,359.6 2,831.6 3,139.5 Short-term debt 77.0 77.0 77.0 77.0 Income tax (472.2) (567.9) (684.7) (759.4) Other current liabilities 778.0 909.9 1,060.5 1,197.7 Minorities (190.1) (216.2) (285.8) (311.2) Total current liabilities 3,252.3 3,419.6 4,042.6 4,687.2 Long-term debt 0.0 0.0 0.0 0.0 Net income pre-preferred dividends 1,294.6 1,575.4 1,861.1 2,068.9 Other long-term liabilities 3.1 3.1 3.1 3.1 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 3.1 3.1 3.1 3.1 Net income (pre-exceptionals) 1,294.6 1,575.4 1,861.1 2,068.9 Total liabilities 3,255.4 3,422.7 4,045.8 4,690.3 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 1,294.6 1,575.4 1,861.1 2,068.9 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 9,065.1 10,118.1 11,306.2 12,564.8 EPS (basic, pre-except) (Rmb) 1.39 1.61 1.91 2.12 Minority interest 640.8 857.1 1,142.9 1,454.1 EPS (basic, post-except) (Rmb) 1.39 1.61 1.91 2.12 EPS (diluted, post-except) (Rmb) 1.33 1.61 1.91 2.12 Total liabilities & equity 12,961.4 14,397.9 16,494.9 18,709.2 DPS (Rmb) 0.400.540.690.83 Dividend payout ratio (%) 28.7 33.2 36.2 39.2 BVPS (Rmb) 9.29 10.36 11.58 12.87 Free cash flow yield (%) 2.9 1.1 2.7 3.9

Growth & margins (%) 12/13 12/14E 12/15E 12/16E Ratios 12/13 12/14E 12/15E 12/16E Sales growth 8.1 12.5 11.0 9.7 CROCI (%) 22.5 17.5 18.6 18.0 EBITDA growth 26.3 25.5 23.5 11.6 ROE (%) 17.7 16.4 17.4 17.3 EBIT growth 28.7 23.1 22.0 11.2 ROA (%) 11.8 11.5 12.0 11.8 Net income growth 28.7 21.7 18.1 11.2 ROACE (%) 56.8 51.8 46.6 43.2 EPS growth 22.1 15.7 18.1 11.2 Inventory days 31.4 38.5 47.7 53.8 Gross margin 23.8 24.6 25.1 25.5 Receivables days 23.1 24.1 29.0 34.0 EBITDA margin 10.4 11.6 13.0 13.2 Payable days 59.0 59.6 59.7 64.8 EBIT margin 9.7 10.6 11.6 11.8 Net debt/equity (%) (72.2) (63.9) (60.2) (59.2) Interest cover - EBIT (X) NM NM NM NM

Cash flow statement (Rmb mn) 12/13 12/14E 12/15E 12/16E Valuation 12/13 12/14E 12/15E 12/16E Net income pre-preferred dividends 1,294.6 1,575.4 1,861.1 2,068.9 D&A add-back 136.0 210.8 291.8 336.8 P/E (analyst) (X) 23.5 23.2 19.6 17.7 Minorities interests add-back 190.1 216.2 285.8 311.2 P/B (X) 3.5 3.6 3.2 2.9 Net (inc)/dec working capital 8.7 (885.1) (625.5) (358.1) EV/EBITDA (X) 13.2 13.3 10.7 9.4 Other operating cash flow (159.2) (84.1) (103.7) (118.7) EV/GCI (X) 2.4 2.6 2.3 1.9 Cash flow from operations 1,470.2 1,033.2 1,709.7 2,240.1 Dividend yield (%) 1.2 1.4 1.8 2.2

Capital expenditures (576.0) (639.1) (703.8) (766.9) Acquisitions 0.0 0.0 0.0 0.0 Divestitures 1.3 0.0 0.0 0.0 Others 80.7 0.0 0.0 0.0 Cash flow from investments (494.0) (639.1) (703.8) (766.9)

Dividends paid (common & pref) (308.0) (390.5) (522.5) (673.1) Inc/(dec) in debt 93.8 0.0 0.0 0.0 Common stock issuance (repurchase) 2,529.3 0.0 0.0 0.0 Other financing cash flows (171.4) 0.0 0.0 0.0 Cash flow from financing 2,143.7 (390.5) (522.5) (673.1) Total cash flow 3,119.9 3.6 483.4 800.2 Note: Last actual year may include reported and estimated data. Source: Company data, Goldman Sachs Research estimates.

Analyst Contributors

Zhijing Liu [email protected]

Xufa Liao, CFA [email protected]

Zhujing Fang [email protected]

Goldman Sachs Global Investment Research 2 August 25, 2014 China International Travel Service Corp. (601888.SS)

We believe Haitang Bay will be a key growth area for Sanya’s tourism industry, as growth accelerates in 2015 and 2016

Sanya’s tourist traffic is currently concentrated around the city center and Sanya Bay, but high-end tourists congregate at Yalong Bay and Haitang Bay. Based on tourist traffic, we divide Sanya into four areas: Sanya Bay, the city center (including Dadonghai), Yalong Bay and Haitang Bay. Of these, Sanya Bay and the city center are the western sites, while Yalong Bay and Haitang Bay are the eastern sites. Currently, most visitors to Sanya are concentrated at the city center and Sanya Bay, which have a greater concentration of tourist sites, including the Nanshan scenic area, and China Duty Free Group’s (CDFG) Dadonghai duty-free store; by comparison, Yalong Bay and Haitang Bay merely have second-tier tourist attractions, including the Tropical Paradise Forest Park and . In terms of available star-rated hotel rooms, Sanya Bay and Dadonghai have nearly 29,000, while Yalong Bay and Haitang Bay have around 7,887 and 2,515, respectively (based on 2012 data) – Haitang Bay in particular is still in the early stages of its development. However, Yalong Bay and Haitang Bay have 90% of the five-star hotels, making them the main destination for Sanya’s high-end tourists. Over the next three years, we believe Haitang Bay will be a key development area for the local tourism industry, with new hotel openings set to peak in 2015-2016. Haitang Bay is a major not-yet-fully developed bay in Sanya – with its clear water, white sand and other natural endowments; it has been named a “national beach” in the tourism industry plans by the government. The local tourism commission has attracted a number of high- end hotel, entertainment and tourism projects which will open in the next 3-5 years. These include major projects like the 301 Hospital (already in operations), Haitang Bay International Shopping Complex (CDFG’s duty-free center) and Menghuan Buyecheng, as well as three seven-star hotels – the Atlantis, Waldorf and Fairmont. Once these projects are complete, Haitang Bay will be positioned as a complete tourism destination which is higher-end than Yalong Bay, and with a richer variety of entertainment options. Based on information released by top-tier beachfront hotels, we estimate Haitang Bay will add approximately 1,500 rooms each year in 2015 and 2016, representing a yoy growth rate of 47% and 31%, respectively. This will increase the annual tourist capacity for Haitang Bay from 2.18 mn in 2014 to 4.18 mn in 2016, almost as high as Yalong Bay and Dadonghai. In fact, actual Haitang Bay visitors in 2013 totaled 710,000 and 1H14 growth was 87%, leading us to estimate a total of 1.33 mn visitors for 2014. We estimate significant improvements in shopping, entertainment, hotels and infrastructure for Haitang Bay, making it an increasingly important destination in Sanya.

Goldman Sachs Global Investment Research 3 August 25, 2014 China International Travel Service Corp. (601888.SS)

Exhibit 1: Tourist traffic to Sanya is concentrated in the city center (including Dadonghai) and Sanya Bay

Haitang Bay Duty Free store 40km, 40 minutes drive Nanshan area Tianya Wuzhizhou Phoenix Airport Haijiao Island SC's Sanya project Forrest Park Dadonghai Duty Free store Dadonghai

Tourist volume of Sanya Area, mn, 2013 Supply of Sanya hotels, 2012 Star-rated hotel room Catering volume/year, Location Scenic area Location Volume numbers mn Sanya Phoenix Airport West, Sanya Bay 12.00 Sanya Bay 21,045 11.52 Nanshan West, Sanya Bay 3.88 Yalong Bay 7,825 4.28 Tianya Haijiao West, Sanya Bay 3.82 Dadonghai 7,887 4.32 Yalong Bay East, Yalong Bay 3.15 Haitang Bay 2,515 1.38 Dadonghai Duty Free store Central, Dadonghai 3.00 Total 39,272 21.50 Yalong Bay Forrest Park East, Yalong Bay 2.50 Tourist volume of Sanya hotels, 2013 12.28 Wuzhihzhou Island East, Haitang Bay 1.45 Occupancy rate-calculated 57.11% SC's Sanya project Central 1.00 Occupancy rate-TA of Hainan 56.75% Haitang Bay ocean view hotels East, Haitang Bay 0.71

Source: Hainan Tourism Bureau, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 4 August 25, 2014 China International Travel Service Corp. (601888.SS)

Exhibit 2: Local hotel supply in Sanya: Hotels in Haitang Bay will increase significantly over the next two years by our estimates

Room volume, 2012 Star rating Sanya Bay Yalong Bay Dadonghai Haitang Bay Total up to 2-star/comfortable 5,460 362 1,750 75 7,647 3-star/comfortable 2,441 83 1,270 3,794 4-star/premium 3,543 456 2,784 709 7,492 5-star/luxury 9,601 6,924 2,083 1,731 20,339 Total 21,045 7,825 7,887 2,515 39,272

Catering volume/year, mn, 2012, 1.5pax/room Star rating Sanya Bay Yalong Bay Dadonghai Haitang Bay Total up to 2-star/comfortable 3.0 0.2 1.0 0.0 4.2 3-star/comfortable 1.3 0.0 0.7 - 2.1 4-star/premium 1.9 0.2 1.5 0.4 4.1 5-star/luxury 5.3 3.8 1.1 0.9 11.1 Total 11.5 4.3 4.3 1.4 21.5

Haitang Bay room number forecast 2012 2013 2014E 2015E 2016E Star rated hotel number 6 8 11 16 18 Room number 2422 3161 3975 5834 7634 Catering volume/yr, mn 1.33 1.73 2.18 3.19 4.18 Average room number 404 395 361 365 424

Source: Hainan Tourism Bureau, Gao Hua Securities Research.

Exhibit 3: We expect top-tier beachfront hotel rooms in Exhibit 4: ...and visitor capacity to increase significantly Haitang Bay to increase rapidly in 2015 and 2016 based as well on developers’ announced plans…

9,000 47% 50% 5.00 47% 50%

8,000 45% 4.50 45%

38% 38% 40% 4.00 40% 7,000

35% 3.50 35% 6,000 31% 31% 31% 31% Existing room 30% 3.00 30% 26% 26% 5,000 Catering volume, mn Accretion 5,834 7,634 25% 2.50 25% YoY growth of room number 4,000 YoY growth 4.58 3,975 20% 2.00 4.18 20%

3,000 3.19 15% 1.50 15% 3,161 10% 10% 2,000 2,422 10% 1.00 2.18 10% 1,752 1.73 745 1.33 1,000 1,859 1,800 5% 0.50 0.96 5% 1,007 745 670 739 814 729 0.41 - 0% 0.00 0% 2010 2011 2012 2013 2014E 2015E 2016E 2017E 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Source: Hainan Tourism Bureau, Gao Hua Securities Research. Source: Hainan Tourism Bureau, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 5 August 25, 2014 China International Travel Service Corp. (601888.SS)

Exhibit 5: Haitang Bay’s visitor capacity has increased Exhibit 6: Haitang Bay has a higher proportion of significantly since 2012 individual tourists than Sanya as a whole 2013 data

1.00 100% 92% Haitang Bay top-tier 87% 90% 0.90 ocean view hotels 80% 41% 0.80 YoY growth 44% 0.71 70% 0.70 60% 0.60 0.54 50%

0.50 40%

0.40 0.37 30% 59% 56% 20% 0.30 10% 0.20 0% 0.10 Haitang Bay Entire Sanya Individual Group 0.00 2012 2013 1H14

Source: Hainan Tourism Bureau. Source: Hainan Tourism Bureau. Haitang Bay will be a popular destination, and key to the development of international tourism in Hainan, in our view. With a number of shopping, cultural, theme park and super-high-end hotel projects scheduled for launch, we believe duty-free shopping will extend the luxury good supply chain. Haitang’s 14 km river system has been developed into a yachting base. We believe Haitang Bay’s content as a tourist destination will become much richer than Yalong Bay or Sanya Bay, becoming a basis for long-term growth in popularity, length of stay and consumption within the area. Looking at Hainan as a whole, Haitang Bay is becoming a key high-end destination, and will be crucial to developing Hainan into an International Tourism Island.

Exhibit 7: Overview of high-end destination projects in Haitang Bay

Construction Investment, Project Opening Area, mu Description start Rmb100mn

Wanda Culture Center 4/1/2009 2010 n.a. n.a. Culture and performing 301 Hospital Hainan Branch 6/9/2009 2013 900 13 Large, top-tier hospital Haitang Bay International Shopping Center 6/9/2012 2014 770 25 Largest in-town duty free store on the world International town 8/28/2012 2014 n.a. 31 Residential area of locals, destination of Haitang Bay tour Fairmont Hotel n.a. 2015 n.a. n.a. 7-star hotel All-around entertainment area, including theme park, Haitang Bay Dream Nightlife Village 12/26/2013 2016 1000 69 performing and accomodations Atlantis and Aquariam End of 2013 2016 806 >100 7-star hotel, aquariam and international convention Waldorf Astoria Hotel n.a. 2017 n.a. n.a. 7-star hotel Haitang Bay Minsheng Art Center 4/23/2013 n.a. n.a. 4.5 Art center

Source: 163.com, Ctrip.com.

Goldman Sachs Global Investment Research 6 August 25, 2014 China International Travel Service Corp. (601888.SS)

CDFG’s project could be a growth engine for the Haitang Bay area

CDFG’s project could be a growth engine for the Haitang Bay area. CDFG’s Haitang Bay International Shopping Complex project is scheduled to open on September 1, and will be the first integrated tourism project to open, outside of a few Haitang Bay hotels. At the same time, duty-free sales at the Dadonghai store will cease. Since duty-free shopping is of significant importance to Chinese tourists, and the Dadonghai store had around 3 mn visits in 2013, we believe the duty-free project will be a development engine for the whole of Haitang Bay. The local government is also quite focused on how much visitor traffic the duty-free project will attract, and are providing infrastructure and publicity support.

Haitang Bay’s existing visitor traffic bodes well for CDFG’s project. As mentioned above, we estimate total Haitang Bay tourist volume will reach 1.33 mn this year, which will provide sufficient traffic for CDFG at its duty-free project. For this reason, CDFG is closely focused on these potential consumers, and has plans to provide Haitang Bay hotel guests with attractive shopping deals when it opens.

Transportation is a short-term challenge, but it can be overcome. The Haitang Bay project is 40 km from the Sanya city center – approximately a 40 minute drive on the highway. Because of this, many investors are worried that the distance will affect consumers’ willingness to patronize the store. However, we believe that: 1) Duty-free stores remain very attractive to Chinese tourists – particularly a 70,000 sqm store like the Haitang project – and this project is the only such store among the area’s tourism projects; 2) annual visitors to the Haitang Bay store could exceed 1 mn, which – adding in the 3 mn annual visitors to the Dadonghai store, and omitting some for double-counting or loss – leaves room for further growth, in our view; 3) Tianya Haijiao and the Nanshan scenic area are 25 km and 53 km from the city center, respectively, but each receives over 4 mn visitors annually – mainly because these tourist sites have worked hard to attract tourists, and over 50% of their visitors come from tour groups (as per 2013 data). Meanwhile, 85% of Dadonghai’s revenue comes from individual tourists, meaning there is significant potential to improve tour group penetration; and 4) in terms of transportation, four public transit lines go to Haitang Bay, and CDFG plans to provide 40 free shuttle buses. In addition, the government has reserved a high-speed train station for Haitang Bay. Therefore, we see transportation as a problem in the short term, but one that can be solved.

Once the transportation problem is solved, we see the following four areas as ways the Haitang Bay project could further release the potential of the offshore duty-free policy:

1) Duty-free product supply: Brands, SKUs and floor space at the new project will be 2X, 3X and 4X higher than those at Dadonghai, according to management. We believe this will provide consumers with a wider array of choices and a broader collection of shops, stimulating per capita consumption. In addition, the rich choices may increase opportunities for successful transactions, raising the number of effective shoppers.

2) Shopping center area: Seven times the duty-free floor space of Dadonghai. From our tourist volume investigation of the Sanya site, we found that monthly data on shoppers at Sanya fluctuated significantly, but never exceeded total Sanya visitor growth (i.e. consumer growth is at most equal to tourist growth). This suggests that the Dadonghai store is overly congested, so an influx of new tourists to the area may not be converted into a significant increase in store visits.

Goldman Sachs Global Investment Research 7 August 25, 2014 China International Travel Service Corp. (601888.SS)

3) Shopping environment: Three-storey shopping center with F&B and entertainment facilities. According to management, these amenities will make the shopping center a popular destination for tourists, elevating consumers’ shopping experience and increasing their length of stay, which will in turn raise per capita consumption and the conversion rate from visitor to purchaser. Based on per capita spending by Chinese customers at various duty-free stores in South Korea, we believe downtown stores have a potential per capita consumption approximately 7X that of airport locations – mainly due to increased length of stay vs. airport duty-free stores.

4) We believe potential factors driving continued CITS growth in Sanya include: As the tourist environment of Sanya continues to improve over the next three years, we believe Haitang Bay could become crucial to the upgrade of the local tourism industry; construction of a duty-free shopping platform; further increasing of duty-free shopping limits; and extending duty-free shopping to ferry passengers.

Exhibit 8: We believe the Haitang Bay project will meaningfully unleash the offshore duty- free policy potential

Change from Haitang bay project Per capita spending Shopping person‐time Instant improvements 3x more shops, 2x more SKUs, 1x more Duty free goods brands 11 Shopping area 6x more than previous area 11

Food & beverages catering area/entertainment area on 3rd floor Amenities 11 Potential improvements Haitang Bay will be the focus of Sanya Tourism environment tourism in the following 3 years, CITS' 1 project will be the engine of this trend Duty free shopping online 's store has already launched 11 platform online platform Upside still exist for the limit, depending Limit rise on the performance of Haitang Bay 1 project 5mn cruise tourists connot buy duty free Increase in tourist base 1 goods now

Note: A tick indicates that the particular improvement would have a positive impact on per capita spending, shopping person-time, or both.

Source: Company data, Gao Hua Securities Research.

What we expect and what we would watch out for. In our first two Haitang Bay previews, we analyzed the revenue potential of the new project and the question of profit margins. In fact, we estimate per capita consumption and visitor growth of just 10% and 5%, respectively, for 2015. However, we believe that, due to the aforesaid improvements in duty-free product supply, area and shopping environment, there are significant growth opportunities for per capita consumption and number of shoppers. These are the indicators we will be monitoring very closely for the new project. In addition, we will continue to focus on CDFG and Sanya subsidiary profit margin trends as disclosed in upcoming financial reports, as well as the combined profit margins for the company in Sanya as implied by these data (for more discussion of CITS’ profit margins in Sanya, see our report Haitang Bay preview (2): Dissecting Sanya’s performance, CL-Buy, dated August 18, 2014).

Goldman Sachs Global Investment Research 8 August 25, 2014 China International Travel Service Corp. (601888.SS)

Exhibit 9: Our estimates for the Haitang Bay International Shopping Complex

Haitang Bay project Units 2014 E 2015 E 2016 E 2017 E Revenue Rmb bn 1.39 4.20 4.84 5.57 Duty free Rmb bn 1.31 4.12 4.76 5.49 Rent Rmb bn 0.08 0.08 0.08 0.08 COGS Rmb bn 0.66 2.06 2.38 2.74 Gross margin 53% 51% 51% 51% Sales tax and add-ons Rmb bn 0.12 0.35 0.41 0.47 Rmb bn 0.11 0.35 0.40 0.47 Rmb bn 0.00 0.00 0.00 0.00 D&As Rmb bn 0.06 0.17 0.17 0.17 Labor costs Rmb bn 0.04 0.13 0.14 0.16 Number of employees 2500 2550 2601 2653 Avg. salary per annum k 48 51 55 59 Other expenses Rmb bn 0.10 0.11 0.12 0.13 as % of revenue 7% 3% 3% 2% Pre-tax profit Rmb bn 0.42 1.37 1.62 1.89 Income tax Rmb bn 0.11 0.34 0.40 0.47 Net profit Rmb bn 0.32 1.03 1.21 1.42 Net profit margin 23% 25% 25% 26%

Source: Gao Hua Securities Research.

Exhibit 10: Sanya duty-free market historicals and estimates

Units 2011 2012 2013 2014 E 2015 E 2016 E 2017 E Sanya duty free market Visitors departing from Sanya mn 5.0 5.5 5.9 6.4 6.9 7.3 7.8 Shopping penetration 10% 15% 13% 13% 13% 14% 14% Number of shoppers mn 0.49 0.84 0.79 0.83 0.91 1.01 1.10 YoY 71% -5% 5% 6% 5% 5% Consumption per shopper Rmb 2,051 2,438 3,562 4,097 4,506 4,732 4,968 YoY 19% 46% 15% 10% 5% 5% Market size Rmb bn 1.01 2.04 2.83 3.41 4.12 4.76 5.49 YoY 103% 39% 21% 21% 16% 15% Dadonghai store Rmb bn 1.01 2.04 2.83 2.10 0.00 0.00 0.00 Haitang Bay project Rmb bn 1.31 4.12 4.76 5.49 Share Dadonghai store 100% 100% 100% 61% 0% 0% 0% Haitang Bay project 0% 0% 0% 39% 100% 100% 100%

Source: Wind, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 9 August 25, 2014 China International Travel Service Corp. (601888.SS)

Exhibit 11: CITS historicals and estimates Rmb mn, 2006-2016E

2006 2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E Total revenue 4855 5967 5819 6065 9608 12695 16134 17448 19637 21792 23897 YoY 22.9% -2.5% 4.23% 58% 32% 27% 8% 13% 11% 10% T&T service 3538 4257 3668 3747 6716 8529 10602 10772 11812 12866 13918 Inbound tourism 1456 1672 1084 837 1113 956 1061 665 752 842 934 Outbound tourism 1102 1329 1421 1439 2782 3857 5168 6088 6575 7061 7541 Domestic tourism 805 1062 951 1169 2264 2958 3383 3087 3426 3769 4108 Ticket agent 146 171 173 141 195 244 220 252 277 302 326 Other 30 23 38 161 364 513 771 680 782 891 1007 Retailing 1313 1704 2132 2284 2833 4071 5400 6470 7597 8676 9704 Duty-free 1216 1622 1972 2220 2702 3856 5135 5969 6946 7927 8864 Duty-paid 97 82 160 65 131 215 265 501 651 749 839 Other 3 519335895132207228250275 Gross margin 18.8% 18.74% 21.5% 22.6% 18.9% 20.7% 21.7% 23.8% 24.6% 25.1% 25.5% Travel agency 13.6% 13.8% 14.7% 13.3% 11.5% 10.6% 9.8% 9.9% 10.0% 10.0% 10.0% Travel retail 32.8% 30.9% 32.8% 37.1% 35.5% 40.7% 43.3% 44.9% 45.5% 45.7% 46.0% Net profit 173 267 333 436 555 835 1180 1485 1792 2149 2384 Minority interests 31 50 112 123 145 150 175 190 216 286 311 Net profit attributable to parent shareholders 142 217 221 313 410 685 1006 1295 1575 1863 2073 YoY 53% 2% 41% 31% 67% 47% 29% 22% 18% 11% Basic EPS (Rmb) 0.67 0.41 0.47 0.78 1.14 1.39 1.61 1.91 2.12 Net profit attributable to parent shareholders 142 217 221 313 410 685 1006 1295 1575 1863 2073 CITS 36 45 38 27 41 22 31 61 86 94 102 CDFG 126 192 204 296 363 675 980 1216 1447 1685 1911 Sanya store -20 280 489 707 846 1031 1212 CDFG, excl. Sanya store 383 395 491 509 601 655 699 Corporate and others -20 -20 -21 -10 5 -12 -5 18 43 83 59

Source: Company data, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 10 August 25, 2014 China International Travel Service Corp. (601888.SS)

Disclosure Appendix Reg AC We, Zhijing Liu, Xufa Liao, CFA and Zhujing Fang, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Zhijing Liu: China Food and Beverage, China Tourism. Xufa Liao, CFA: China Food and Beverage, China Media. Zhujing Fang: China Media. China Food and Beverage: Anhui Gujing Distillery Co., Bright Dairy, Foshan Haitian Flavouring and Food Co., Ltd., Guangxi Nanfang Foodstuff Group Stock Co Ltd, Hebei Cheng De Lolo Co., Ltd., Jiajia Food Group Co., Ltd., Jiangsu Yanghe Brewery Joint-Stock Co., Jonjee Hi-Tech Industrial Co, Ltd, Kweichow Moutai, Luzhou Laojiao, Qinghai Huzhu Barley Wine Co., Ltd., Shanxi Xinghuacun Fen Wine Factory Co., Wuliangye Yibin, Yili Industrial, Zhejiang Beingmate SIT Share Co., Ltd.. China Media: Anhui Xinhua Media, Beijing Enlight Media Co., Beijing Gehua CATV, Beijing Hualubaina Film & TV Co., BesTV New Media, BlueFocus Communication, Chengdu B-ray Media, China South Publishing & Media, Chinese Universe Publishing and Media, Guangdong Advertising, Guangdong Alpha Animation, Hangzhou Shunwang Technology Co., Ltd, Huayi Brothers Media, Hubei Broadcasting & Television Information Network Co., Jiangsu Phoenix Publishing & Media, Leshi Internet Information & Technology, Ourpalm Co., Ltd, Shaanxi Broadcast & TV Network, Shenzhen Topway Video Communication, Time Publishing & Media, Wasu Media Holding Co., Ltd, Zhejiang Daily Media Group Co., Ltd, Zhejiang Huace Film & TV. China Tourism: China CYTS Tours Holding Co., China International Travel Service Corp., Emei Shan Tourism Co., Huangshan Tourism Development (B), Huangshan Tourism Development Co., Shanghai Jinjiang International Hotels, Songcheng Performance Development Co Ltd. Company-specific regulatory disclosures The following disclosures relate to relationships between The Goldman Sachs Group, Inc. (with its affiliates, "Goldman Sachs") and companies covered by the Global Investment Research Division of Goldman Sachs and referred to in this research. Goldman Sachs has received compensation for non-investment banking services during the past 12 months: China International Travel Service Corp. (Rmb37.41) Goldman Sachs had a non-securities services client relationship during the past 12 months with: China International Travel Service Corp. (Rmb37.41) Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 54% 14% 42% 36% 30% As of July 1, 2014, Goldman Sachs Global Investment Research had investment ratings on 3,697 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by NASD/NYSE rules. See 'Ratings, Coverage groups and views and related definitions' below.

Goldman Sachs Global Investment Research 11 August 25, 2014 China International Travel Service Corp. (601888.SS)

Price target and rating history chart(s) China International Travel Service Corp. (601888.SS) Stock Price Currency : Chinese Renminbi Goldman Sachs rating and stock price target history 45 3,000 41 39.1 38.3 38.7 40 37.1 37.2 2,800 33.5 44.1 35 37.1 31.2 36.5 2,600

30 2,400

25 2,200 37.7 20 2,000 e e B A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J 2011 2012 2013 2014 Index Pric Stock Pric Stock Source: Goldman Sachs Investment Research for ratings and price targets; FactSet closing prices as of 6/30/2014. Rating Covered by Zhijing Liu, Price target as of Feb 18, 2013 Price target at removal Not covered by current analyst Shanghai SE A Share Index

The price targets show n should be considered in the context of all prior published Goldman Sachs research, w hich may or may not have included price targets, as w ell as developments relating to the company, its industry and financial markets.

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Goldman Sachs Global Investment Research 13 August 25, 2014 China International Travel Service Corp. (601888.SS)

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