[Korea] Travel Retail Hotel Shilla Buy (008770 KS) (Maintain) Additional negatives to be limited TP: W100,000 Upside: 42.2% Mirae Asset Daewoo Co., Ltd. Myoungjoo Kim [email protected] Minjeong Kyeong [email protected] 2Q20 review Larger-than-expected operating loss For 2Q20, Hotel Shilla reported consolidated revenue of W523bn (-61.4% YoY) and an operating loss of W63.4bn (turn to loss YoY). The operating loss was larger than the market expectation. The weak results were attributable to: 1) disappointing sales of unsold duty-free inventory to third parties overseas; and 2) increased commission fees following a recovery in small daigou. A QoQ rise in the discount rate given to large-scale daigou also contributed to the weak results. Additional negatives to be Despite lingering uncertainties, additional negatives to be limited limited Hotel Shilla suffered a significant operating loss for the second straight quarter despite sharp rent cuts (W56bn; about four months’ worth) at Incheon International Airport (IIA). Store traffic failed to recover amid the lingering impact of COVID-19. Due to the prolonged effects of the pandemic, uncertainty still surrounds the recovery outlook. That said, we believe additional negatives beyond COVID-19 are limited. Despite the pandemic, sales to daigou are proving resilient, showing that demand for Korean cosmetics and duty-free channels remains solid. Accumulate on weakness Maintain Buy and TP of W100,000 We see no additional negatives aside from COVID-19. Hotel Shilla’s stock is trading at a 2021F P/E of 16.0x. Valuation does not look demanding, assuming a normalization in business conditions in 2021. We believe the current share price reflects all COVID-19-related uncertainties and sluggish earnings. Near-term share price weakness is possible, given the weak 2Q20 results and persistent uncertainties. We recommend taking any correction as an opportunity to accumulate shares. Key data Current price (7/31/20, W) 70,300 Market cap (Wbn) 2,759 160 Hotel Shilla KOSPI OP (20F, Wbn) -149 Shares outstanding (mn) 40 140 120 Consensus OP (20F, Wbn) -120 Free float (%) 77.2 100 EPS growth (20F, %) - Foreign ownership (%) 21.3 80 P/E (20F, x) - Beta (12M) 1.04 60 Market P/E (20F, x) 15.8 52-week low (W) 61,800 7.19 11.19 3.20 7.20 KOSPI 2,249.37 52-week high (W) 108,500 Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2016 2017 2018 2019 2020F 2021F Absolute -1.0 -19.6 -10.7 Revenue (Wbn) 3,715 3,515 4,714 5,717 3,475 6,876 Relative -7.2 -24.2 -19.6 OP (Wbn) 79 73 209 296 -149 308 OP margin (%) 2.1 2.1 4.4 5.2 -4.3 4.5 NP (Wbn) 28 25 110 170 -180 176 EPS (W) 696 632 2,758 4,243 -4,501 4,395 ROE (%) 4.0 3.8 15.4 20.2 -21.8 21.7 P/E (x) 69.2 134.3 27.7 21.4 - 16.0 P/B (x) 2.5 4.4 3.5 3.5 3.4 2.8 Dividend yield (%) 0.7 0.4 0.5 0.4 0.5 0.5 Notes: Under consolidated K-IFRS; NP is attributable to owners of the parent Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 3, 2020 Hotel Shilla Table 1. 2Q20 review (Wbn, %, %p) 2Q20 Growth 2Q19 1Q20 Mirae Asset Actual Consensus YoY QoQ Daewoo Revenue 1,355 944 523 535 657 -61.4 -44.6 OP 79 -67 -63 -56 -53 TTR RR OP margin (%) 5.8 - - NP 52 -74 -68 -54 -55 TTR RR Note: NP is attributable to owners of the parent. Source: DataGuide; company data, Mirae Asset Daewoo Research Table 2. Earnings forecast revisions (Wbn, %) Previous Revised % chg. Notes 2020F 2021F 2020F 2021F 2020F 2021F Revenue 5,113 6,689 3,475 6,876 -32.0 2.8 Lowered 2H20 OP 31 303 -147 308 TTR 1.7 estimates to reflect OP margin (%) 0.6 4.5 -4.2 4.5 -4.8 0.0 prolonged impact of COVID-19 NP -43 182 -181 176 RR -3.0 Note: NP is attributable to owners of the parent. Source: DataGuide, Mirae Asset Daewoo Research Table 3. Earnings and forecasts (consolidated) (Wbn) 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20F 4Q20F 2018 2019 2020F 2021F Revenue 1,126 1,175 1,220 1,193 1,343 1,355 1,475 1,544 944 523 809 1,200 4,714 5,717 3,475 6,876 Duty-free 1,014 1,055 1,094 1,072 1,225 1,227 1,339 1,411 849 439 704 1,062 4,234 5,201 3,055 6,324 Downtown 581 613 626 621 721 756 856 941 559 394 579 791 2,441 3,274 2,322 3,835 Airport 432 442 468 451 504 470 482 470 290 46 125 271 1,793 1,927 732 2,488 Hotel/leisure 112 120 127 121 118 128 137 133 94 84 105 138 480 516 421 553 COGS 594 600 631 637 753 741 861 887 588 292 474 735 2,462 3,301 2,090 3,970 COGS ratio (%) 53 51 52 53 56 55 58 57 62 56 59 61 52.2 57.7 60 58 SG&A 487 505 521 529 509 534 557 580 422 295 378 438 2,042 2,121 1,534 2,599 OP 44 69 68 27 82 79 57 78 -67 -63 -44 26 209 296 -147 308 Duty-free 48 64 59 25 82 70 45 70 -49 -47 -39 23 196 267 -112 281 Hotel/leisure -3 6 9 2 -1 9 12 8 -18 -16 -4 3 13 29 -35 28 Pretax profit 42 65 66 -25 67 68 38 54 -93 -82 -55 3 147 226 -227 234 NP 32 53 47 -21 52 52 28 38 -74 -68 -42 2 110 170 -181 176 YoY (%) Revenue 10 31 14 127 19 15 21 29 -30 -61 -45 -22 34 21 -39.2 97.9 OP 342 303 124 77 85 14 -16 182 TTR TTR TTR -66 186 41 TTR TTB NP 1,074 1,668 275 -402 64 -1 -41 TTB TTR TTR TTR -94 336 54 TTR TTB Note: NP is attributable to owners of the parent. Source: Company data, Mirae Asset Daewoo Research Mirae Asset Daewoo Research 2 August 3, 2020 Hotel Shilla Hotel Shilla (008770 KS) Income statement (summarized) Balance sheet (summarized) (Wbn) 2018 2019 2020F 2021F (Wbn) 2018 2019 2020F 2021F Revenue 4,714 5,717 3,475 6,876 Current assets 1,272 1,716 1,410 1,901 Cost of revenue 2,462 3,301 2,090 3,970 Cash & equivalents 282 508 472 459 Gross profit 2,252 2,416 1,385 2,906 AR & other receivables 203 266 207 319 SG&A expenses 2,042 2,121 1,534 2,599 Inventory 704 849 660 1,019 OP (adj.) 209 296 -149 308 Other current assets 83 93 71 104 OP 209 296 -149 308 Non-current assets 1,032 1,811 1,780 1,856 Non-operating profit -62 -70 -80 -74 Investments in associates 34 48 37 57 Net financial income -8 -27 -29 -35 PP&E 697 675 654 637 Net income from associates 0 0 0 0 Intangible assets 48 56 60 44 Pretax profit 147 226 -229 234 Total assets 2,304 3,527 3,190 3,757 Income tax 37 56 -49 58 Current liabilities 1,003 1,438 1,356 1,749 Profit from continuing operations 110 169 -180 176 AP & other payables 350 507 394 608 Profit from discontinued operations 0 0 0 0 Short-term financial liabilities 160 419 564 527 NP 110 169 -180 176 Other current liabilities 493 512 398 614 Attributable to owners 110 170 -180 176 Non-current liabilities 536 1,170 1,103 1,114 Attributable to minority interests 0 0 0 0 Long-term financial liabilities 499 1,143 1,082 1,082 Total comprehensive income 110 168 -175 176 Other non-current liabilities 37 27 21 32 Attributable to owners 110 168 -175 176 Total liabilities 1,539 2,608 2,458 2,864 Attributable to minority interests 0 0 0 0 Equity attributable to owners 764 920 731 894 EBITDA 284 515 86 540 Capital stock 200 200 200 200 FCF 76 338 -71 203 Capital surplus 197 197 197 197 EBITDA margin (%) 6.0 9.0 2.5 7.9 Retained earnings 475 627 434 596 OP margin (%) 4.4 5.2 -4.3 4.5 Minority interests 1 0 0 0 Net margin (%) 2.3 3.0 -5.2 2.6 Shareholders' equity 765 920 731 894 Cash flow statement (summarized) Key valuation metrics/ratios (Wbn) 2018 2019 2020F 2021F 2018 2019 2020F 2021F Operating cash flow 154 404 95 403 P/E (x) 27.7 21.4 - 16.0 NP 110 169 -180 176 P/CF (x) 10.6 7.1 73.6 5.6 Non-cash income/expenses 178 341 218 326 P/B (x) 3.5 3.5 3.4 2.8 Depreciation 62 205 217 217 EV/EBITDA (x) 12.0 9.0 45.9 7.3 Amortization 12 15 18 15 EPS (W) 2,758 4,243 -4,501 4,395 Other 104 121 -17 94 CFPS (W) 7,201 12,764 955 12,535 Chg.