Company Note Hotel Shilla (008770.KS) M.PERFORM / TP KRW95,000 July 30, 2019 Retail/Trading Companies/Paper Park Jong-ryeol +822-3787-2099 [email protected] Earnings momentum to weaken in 2H19 Share price (KRW, Jul 29) 79,700 1) Investment highlights Upside (%) 19.2 - 2Q19 earnings will likely miss the consensus estimate. DFS sales, which have been growing sharply, are Market cap (KRW bn) 3,128 likely to lose steam in 2H19 due to weak outbound demand and the slowing growth in Chinese inbound Shares outstanding (’000) 39,248 travelers amid the downturn of the Chinese economy. Paid-in capital (KRW bn)/ Face value (KRW) 200/5,000 - We revise down our earnings forecasts in light of unfavorable sector fundamentals. We also trim our 52-week high/low (KRW) 115,000/69,500 target price from KRW116,000 to KRW95,000 while keeping our rating at Marketperform. 60-day avg. daily T/O (KRW bn) 49 Foreign ownership (%) 28.39 2) Major issues and earnings outlook Major shareholders (%) Samsung Life Insurance - 2Q19 results were slightly below consensus estimates, with consolidated sales of KRW1.35tn (+15% and 5 others 17.34 YoY) and operating profit of KRW79.2bn (+14% YoY). Price performance 1M 3M 6M - DFS sales rose 16% YoY as downtown DFS and airport DFS sales grew 23% and 6% YoY respectively. DFS Absolute (%) -11.8 -22.5 2.7 operating profit increased only 9.1% YoY to KRW69.8bn on a 5.7% operating margin, down 0.4%p YoY. Relative (%p) -9.8 -18.3 8.3 Broker commissions to attract tourists continued to fall, which is positive, but SG&A costs including rent K-IFRS, consolidated and marketing costs rose, which worked to squeeze margins. (KRW) 18F EPS 19F EPS TP - Hotel and leisure sales grew 7% YoY to KRW128.4bn, led by an increase in the room occupancy ratio Previous 4,993 5,388 116,000 across all hotel chains, spending per customer, and the travel business’s growing sales. Operating profit Revised 4,391 4,737 95,000 jumped to KRW9.4bn from the KRW5.5bn seen in the same period last year, thanks to a higher Consensus 4,932 5,878 131,000 occupancy rate and customer spending at Hotel Shilla Seoul and the Shilla Stay chain. Difference (%) -11.0 -19.4 -27.5 Earnings momentum is expected to slow in 2H19. The fall of Japan-bound tourists and the overall - slowdown of outbound travelers amid the economic slump are likely to weigh on airport DFS sales. Also, 12-month price performance the growth in Chinese inbound travelers is likely to lose steam due to the Chinese economic downturn. Hotel Shilla 140 Intensifying competition in the DFS space will likely stifle growth in profitability. In all, unfavorable KOSPI 120 sector fundamentals are expected to weaken earnings momentum. 100 80 3) Share price outlook and valuation 60 - The stock currently trades at 17.4x P/E and 3.2x P/B on 12-month-forward earnings. 40 - In addition to a demanding valuation, slowing earnings momentum in 2H19 will likely prevent the stock 20 from rallying. 0 18.07 18.09 18.11 19.01 19.03 19.05 19.07 Source: WiseFn, Hyundai Motor Securities Earnings forecasts and valuations Sales OP NP EBITDA EPS Growth P/E P/B EV/EBITDA ROE Div. yield (KRW bn) (KRW bn) (KRW bn) (KRW bn) (KRW) (%YoY) (x) (x) (x) (%) (%) 2017 3,515 73 25 145 637 -9.2 133.3 5.1 26.0 3.8 0.4 2018 4,714 209 110 284 2,803 340.3 27.3 4.0 12.0 15.4 0.5 2019F 5,363 293 173 376 4,391 56.6 18.2 3.5 13.1 20.6 0.4 2020F 5,725 316 186 401 4,737 7.9 16.8 2.9 11.8 18.6 0.4 2021F 5,953 333 203 420 5,168 9.1 15.4 2.5 11.0 17.2 0.4 Note: K-IFRS, consolidated COMPANY NOTE Fig 1. 2Q18 review (consolidated) Quarterly earnings Change HMS estimates Consensus (KRW bn) 2Q18 1Q19 2Q19P %YoY %QoQ 2Q19P %diff 2Q19P %diff Sales 1,175 1,343 1,355 15.3 0.9 1,354 0.1 1,385 -2.2 Operating profit 70 82 79 14.0 -3.1 79 0.3 83 -4.1 Pretax profit 65 67 68 4.6 2.0 63 7.8 75 -10.1 Net profit (CI) 53 52 52 -1.0 0.4 48 7.6 53 -2.4 Note: K-IFRS, non-consolidated; TB=turn to black, Source: Company data, WiseFn, Hyundai Motor Securities Fig 2. Earnings revisions (consolidated) Revised Previous %difference (KRW bn) 19F 20F 19F 20F 19F 20F Sales 5,363 5,725 5,338 5,545 0.5 3.3 Operating profit 293 316 311 335 -5.8 -5.7 Pretax profit 223 241 254 275 -12.1 -12.2 Net profit (CI) 173 186 196 212 -11.9 -12.2 Source: Company data, Hyundai Motor Securities Fig 3. Fair target price valuation (KRW bn) 2017F 2018F 12M forward Note 1. Business value 4,869 5,201 5,063 EBITDA 376 401 EV/EBITDA 13.0 13.0 18% discount to average of recent five-year lows (15.8x) 2. Investment value 183 183 183 30% discount to NAV 1) Affiliates 24 24 2) LT available-for-sale securities 0 0 3) Other financial assets 159 159 3. Enterprise value (1+2) 5,051 5,384 5,246 4. Net cash 1,628 1,446 1,522 5. Non-controlling interest 1 1 1 6. Fair shareholders’ equity value ( 3-4-5) 3,423 3,938 3,723 Shares outstanding (‘000 shares) 39,248 39,248 39,248 Fair per-share value (KRW) 87,220 100,328 94,866 Current price (KRW) 79,700 79,700 79,700 Upside potential (%) 9.4 25.9 19.0 Source: Hyundai Motor Securities 2 Retail /Trading Companies/Education/Paper Park Jong-ryeol +822-3787-2099 / [email protected] Fig 4. Earnings forecasts 2018 2019F (KRW bn, %) 2018 2019F 2020F 1Q 2Q 3Q 4Q 1Q 2Q 3QP 4QF Sales 1,126 1,175 1,220 1,193 1,34 1,355 1,362 1,303 4,714 5,363 5,725 TR 1,014 1,055 1,094 1,072 1,225 1,227 1,232 1,179 4,234 4,863 5,215 Hotel & Leisure 112 120 127 121 118 128 130 124 480 500 510 Gross sales 531 575 589 556 591 603 614 578 2,252 2,385 2,537 Operating profit 44 69 68 27 82 79 69 63 209 2 3 316 TR 48 64 59 25 82 70 67 60 196 279 301 Hotel & Leisure -3 6 9 2 0 9 2 3 13 14 15 Pretax profit 42 65 66 -25 67 68 50 39 147 223 241 Net profit 32 53 47 -21 52 52 39 30 110 173 186 Profitability (%) GPM 47.2 48.9 48.3 46.6 44.0 44.5 45.1 44.4 47.8 44.5 44.3 OPM 3.9 5.9 5.6 2.3 6.1 5.9 5.1 4.8 4.4 5.5 5.5 RPM 3.7 5.5 5.4 -2.1 5.0 5.0 3.7 3.0 3.1 4.2 4.2 NPM 2.8 4.5 3.9 -1.8 3.9 3.9 2.9 2.3 2.3 3.2 3.3 Growth (%YoY) Sales 10.2 46.7 14.4 16.6 19.3 15.3 11.6 9.2 20.5 13.8 6.8 TR 9.6 52.6 15.2 18.1 20.9 16.3 12.7 10.0 21.9 14.9 7.2 Hotel & Leisure 16.6 9.4 7.5 4.7 5.5 7.0 2.1 2.1 9.2 4.1 2.1 Operating profit 342.2 302.6 124.2 77.0 85.0 14.1 2.0 128.2 186.1 40.1 7.8 TR 181.7 680.5 152.8 153.5 72.7 9.1 12.9 137.3 235.2 42.1 8.1 Hotel & Leisure RR -39.6 26.5 -56.7 TB 70.4 -73.1 28.7 -10.1 9.0 3.1 Pretax profit 683.1 818.0 220.2 TR 60.3 4.6 -23.2 TB 228.4 51.9 8.1 Net profit 1,074.1 1,668.0 274.9 TR 63.7 -0.7 -17.7 TB 336.3 56.5 7.9 Key assumptions (%YoY) GDP growth (real) 2.8 2.8 2.0 3.1 2.6 2.5 2.6 2.4 2.7 2.5 2.5 Private consumption 3.5 2.8 2.5 2.4 2.4 2.4 2.4 2.3 2.8 2.4 2.4 CPI growth 1.3 1.5 1.5 1.8 1.2 1.4 1.5 1.7 1.3 1.5 1.7 Note: K-IFRS, non-consolidated; TB=turn to black, RR=remain in red Source: Company data, Hyundai Motor Securities 3 COMPANY NOTE Income statement Balance sheet (KRW bn) 2017 2018 2019F 2020F 2021F (KRW bn) 2017 2018 2019F 2020F 2021F Sales 3,515 4,714 5,363 5,725 5,953 Current assets 1,168 1,272 1,562 1,689 1,912 Change (%) -5.4 34.1 13.8 6.8 4.0 Cash and cash equivalents 474 282 300 482 623 Cost of goods sold 1,866 2,462 2,977 3,188 3,300 Short-term investment assets 4 19 17 17 17 % of sales 53.1 52.2 55.5 55.7 55.4 Accounts receivable 77 95 158 149 162 Gross profit 1,649 2,252 2,385 2,537 2,653 Inventory assets 469 704 899 853 922 Gross margin (%) 46.9 47.8 44.5 44.3 44.6 Other current assets 143 169 185 185 185 Change (%) -1.6 36.6 5.9 6.4 4.6 Non-current assets 1,051 1,032 2,294 2,302 2,310 SG&A expenses 1,576 2,042 2,092 2,221 2,320 Tangible assets 693 697 700 708 716 % of sales 44.8 43.3 39.0 38.8 39.0 Intangible assets 44 48 48 48 47 EBITDA 145 284 376 401 420 Investment assets 286 253 262 262 262 EBITDA margin (%) 4.1 6.0 7.0 7.0 7.1 Other non-current assets 28 34 1,284 1,284 1,284 Change (%) -5.8 96.3 32.5 6.8 4.6 Other financial assets 0 0 0 0 0 Operating profit 73 209 293 316 333 Total assets 2,219 2,304 3,856 3,991 4,222 Operating margin (%) 2.1 4.4 5.5 5.5 5.6 Current liabilities 879 1,003 1,523 1,484 1,524 Change (%) -7.4 186.1 40.1 7.8 5.5 Short-term debt 22 10 15 15 15 Non-operating profit -28 -62 -74 -75 -70 Accounts payable 241 284 423 384 424 Interest income 8 11 13 18 22 Current portion of long-term debt 200 150 150 150 150 Interest expenses 22 19 70 77 77 Other current debt 417 559 936 936 936 Other non-operating income -13 -54 -17 -16 -16 Non-current liabilities 672 536 1,420 1,421 1,422 Subsidiaries/affiliate income 0 0 5 0 0 Bonds 649 499 499 499 499 Pretax profit from cont ops 45 147 223 241 263 Long-term debt 0 0 0 0 0 Pretax margin (%) 1.3 3.1 4.2 4.2 4.4 LT financial debt (incl.