August 25, 2014 COMPANY UPDATE China International Travel Service Corp. Buy Equity Research Haitang Bay 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 Hainan’s Low High duty-free revenue potential and CITS’ margins in Sanya. 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 Sanya Bay. In contrast, investment profile measures please refer to 90% of hotels in Yalong Bay 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.