Hotel Shilla (008770.KS) Core business value remains intact We believe that Hotel Shilla’s DFS and hotel divisions both turned to the red Company Comment │ Apr 9, 2020 in 1Q20, with operating losses likely to worsen in 2Q20. However, we adhere to a Buy rating, believing that: 1) the one-off peculiar disruptions being Refer to page 2 for ESG index/event tables caused by the Covid-19 crisis will not impinge upon core business value; and 2) higher Chinese online market consumption will rise once the Covid-19 crisis eases; and 3) Korea-China relations are improving. Buy (maintain) TP W105,000 (lower) CP (20/04/08) W73,800 Sector Retail Near-term operating losses to expand, but maintain Buy rating from Kospi/Kosdaq 1,807.14 / 607.37 mid-term view Market cap (common) US$2,374.18mn Reflecting the impact of the Covid-19 crisis, we downwardly adjust 2020E and Outstanding shares (common) 39.2mn 2021F EPS for Hotel Shilla by 70% and 6%, respectively, lowering our target 52W high (’19/04/30) W115,000 low (’20/03/23) W61,800 P/E from 25x to 20x amid DFS industry uncertainties. But, believing that: 1) the Average trading value (60D) US$61.34mn one-off peculiar disruptions being caused by the Covid-19 crisis will not Dividend yield (2020E) 0.47% impinge upon core business value; and 2) Chinese online market consumption Foreign ownership 25.8% will rise once the Covid-19 crisis eases; and 3) Korea-China relations are Major shareholders improving, we have changed the the base year for EPS for use in calculating our Samsung Life & 5 others 17.3% TP from 2020 to 2021. Reflecting such, we lower our TP by 16% from NPS 12.7% W125,000 to W105,000. Share perf 3M 6M 12M Looking at Hotel Shilla’s DFS arm, business conditions are likely to worsen q-q Absolute (%) -24.2 -8.7 -24.9 Relative (%p) -9.7 3.4 -8.2 in 2Q20 as Chinese reseller activity is being hampered by both China’s full ban on foreign traveler entry and Korea’s self-isolation rules for entering travelers. 2019 2020E 2021F 2022F Although Incheon Airport has announced a 20% reduction in DFS lease fees, Sales 5,717 5,042 6,445 6,971 this benefit is to be overshadowed by a likely roughly 95% drop in sales versus Chg 21.3 -11.8 27.8 8.2 the pre-crisis level. Meanwhile, given that a high portion of the firm’s hotel OP 296 126 321 349 guests are Koreans, the hotel division should benefit from higher domestic Chg 41.5 -57.5 155.3 8.8 travel demand in line with the gradual easing of the Covid-19 crisis in Korea. OPM 5.2 2.5 5.0 5.0 NP 170 61 203 224 EPS 4,317 1,539 5,172 5,708 1Q20 preview: Operating losses inescapable for DFS and hotel arms Chg 54.0 -64.3 236.0 10.4 On a consolidated basis, we expect Hotel Shilla to post 1Q20 sales of W787.8bn P/E 21.0 47.9 14.3 12.9 (-41% y-y) and operating losses of W281 (TTL y-y), with both figures falling P/B 4.0 3.1 2.6 2.2 well wide of consensus. EV/EBITDA 7.5 7.2 4.4 3.9 ROE 20.2 6.4 19.1 17.8 The DFS division should book sales of W726.4bn (-41% y-y) and operating Debt/equity 283.6 254.9 202.1 182.9 losses of W21.9bn (TTL y-y). Amid the Covid-19 crisis, sales at Hotel Shilla’s Net debt 238 124 47 -73 downtown and airport DFSs have plunged 25% and 63% y-y, respectively. In Unit: Wbn, %, won, x particular, the airport DFS is to record hefty operating losses due to minimum Note 1: NP excludes minority interests guaranteed rent payment conditions at domestic and international airports. For Note 2: EPS, P/E, P/B, ROE based on NP (excl minority interests) the hotel division, we see sales of W61.4bn (-48% y-y) and operating losses of Source: NH I&S Research Center estimates W6.1bn (TTL y-y). Occupancy rates appear to be clocking at around 10% at the firm’s Seoul hotel, 50~60% at its Jeju hotel, and 50~60% at its Shilla Stay chain. Of note, hotel players tend to carry high fixed costs, including labor and lease expenses. 1Q19 preview (Unit: Wbn, %) 1Q20E 1Q19 2Q19 3Q19 4Q19 2Q20F Actual y-y q-q Estimate Consen Sales 1,343 1,355 1,475 1,544 788 -41.4 -49.0 1,505 1,252 567 JY Lee, Analyst OP 82 79 57 78 -28 TTL TTL 66 28 -32 822)768-7654, [email protected] OPM 6.1 5.8 3.9 5.0 -3.6 4.4 2.3 -5.7 Pre-tax profit 67 68 38 54 -39 TTL TTL 54 21 -44 Jiyoon Jung, RA 822)768-7705, [email protected] NP (excl minority interests) 52 52 28 38 -29 TTL TTL 32 16 -33 Note: K-IFRS consolidated; Source: FnGuide, NH I&S Research Center estimates Hotel Shilla www.nhqv.com Summary Founded in May 1973, Hotel Shilla engages in DFS and hotel & leisure businesses. The company has 11 DFSs at home and abroad, and manages Hotel Shilla Seoul, Hotel Shilla Jeju, Shilla Stay, JinJi Lake Shilla Hotel, and Geoje Samsung Hotel. In 2019, Hotel Shilla reported sales of W5,717.3bn (+21% y-y), which broke down as DFS 91% and hotel & leisure 9%. The company plans to secure mid/long-term growth via overseas business expansion and the construction of Korean traditional house-style hotels. We suggest a Buy rating and a TP of W105,000. Share price drivers/earnings momentum Downside risks Improvement in Korea-China relations Worsening of Korea-China relations Easing of Covid-19 crisis Lingering of Covid-19 pandemic Growth of Chinese online market Stricter enforcement of e-commerce laws in China Domestic DFS operators’ greater bargaining power Changes in domestic DFS operators and DFS systems Cross valuations (Unit: x, %) Historical valuations (Unit: x, %) P/E P/B ROE Company Valuations 2018 2019 2020E 2021F 2022F 2020E 2021F 2020E 2021F 2020E 2021F Lagardere SCA 10.6 7.4 1.1 1.1 6.9 11.0 P/E 27.3 21.0 47.9 14.3 12.9 Shinsegae 9.1 6.6 0.5 0.5 5.9 7.4 P/B 4.0 4.0 3.1 2.6 2.2 HDS 6.6 5.4 0.3 0.3 5.1 5.7 P/S 0.6 0.6 0.6 0.4 0.4 ROE 15.4 20.2 6.4 19.1 17.8 ROIC 17.4 16.7 5.8 14.7 15.4 Source: FnGuide, Bloomberg, NH I&S Research Center Source: Bloomberg, NH I&S Research Center ESG index (Unit: %, Wbn, years, hours, ‘000TJ, mn tCO2e, mn tons) BOD composition Human resources 2017 2018 2019 Lee Bu-jin CEO, and management committee chairman Inside Portion of female employees 47.3 47.9 48.1 Han In-kyu President Inside Portion of contract workers 19.8 21.3 20.0 Kim Joon-whan - Inside Avg service period per employee 6.5 7.0 7.2 Internal trading committee chairman, and remuneration Jung Jin-ho Outside Avg training hours per employee - - - committee chairman Kim Won-yong Audit committee chairman Outside Moon Jae-woo - Outside Environment 2017 2018 2019 Oh Young-ho - Outside Energy consumption N/A N/A N/A Greenhouse gas emissions N/A N/A N/A Recycled water consumption N/A N/A N/A Recycled waste N/A N/A N/A Source: Hotel Shilla, NH I&S Research Center ESG events – Hotel Shilla Seoul obtained an Eco Mark from Korea Environmental Industry and Technology Institute for its setup of integrated 2017.07 environmental system E – Offered EV driving experience service on Jeju Island in order to encourage eco-friendly activities and provide guests with driving 2019.02 experience for Hyundai Motors’ EVs S 2019.10 – Set up social contribution program that supports restaurant owners on Jeju Island G 2020.02 – Established independent department in charge of monitoring legal compliance Source: Hotel Shilla, NH I&S Research Center 2 Hotel Shilla www.nhqv.com Earnings forecasts (IFRS consolidated) (Unit: Wbn, won, x, %) 2019 2020E 2021F 2022F Sales - Revised 5,717 5,042 6,445 6,971 - Previous - 6,377 6,810 7,228 - Change - -20.9 -5.4 -3.6 OP - Revised 296 126 321 349 - Previous - 317 347 354 - Change - -60.4 -7.5 -1.5 OPM - Revised 5.2 2.5 5.0 5.0 EBITDA 515 427 673 732 NP (excl minority interests) 170 61 203 224 EPS - Revised 4,317 1,539 5,172 5,708 - Previous - 5,049 5,499 5,669 - Change - -69.5 -5.9 0.7 P/E 21.0 47.9 14.3 12.9 P/B 4.0 3.1 2.6 2.2 EV/EBITDA 7.5 7.2 4.4 3.9 ROE 20.2 6.4 19.1 17.8 Note: EPS, P/E, P/B, and ROE based on NP (excl minority interests) Source: NH I&S Research Center estimates Relative valuation (Unit: Wbn, x, won, shr) Value (Wbn) Value/share (won) Remarks Operating value (a) 4,066 103,593 2021F figures applied, given that the current conditions look abnormal 2021F NP 203 5,180 due to Covid-19 P/E X 20.0 X 20.0 DFS sector average EV (a) 4,066 103,593 2021F P/E of 20.0x Outstanding shares (shr) 39,248,121 39,248,121 Source: NH I&S Research Center estimates 3 Hotel Shilla www.nhqv.com Quarterly income statement snapshot (IFRS consolidated) (Unit: Wbn) 1Q19 2Q19 3Q19 4Q19P 2019 1Q20E 2Q20F 3Q20F 4Q20F 2020E Sales 1,343.2 1,354.9 1,475.3 1,544.0 5,717.3 787.8 566.8 1,789.2 1,898.3 5,042.1 y-y (%) 19% 15% 21% 29% 21% -41% -58% 21% 23% -12% DFS 1,225.2 1,226.5 1,338.6 1,410.9 5,201.2 726.4 462.8 1,646.0 1,751.0 4,586.2 y-y (%) 21% 16% 22% 32% 23% -41% -62% 23% 24% -12% In-city DFS 721.0 756.1 856.4 940.5 3,274.0 540.8 340.2 1,113.3 1,222.7 3,217.0 y-y (%) 24% 23% 37% 51% 34% -25% -55% 30% 30% -2% Airport DFS 504.2 470.4 482.2 470.4 1,927.2 185.7 122.6 532.6 528.4 1,369.2 y-y (%) 17% 6% 3% 4% 8% -63% -74% 10% 12% -29% Domestic 229.4 211.4 218.9 218.4 878.1 103.2 42.3 229.8 251.2 626.5 y-y (%) 21% 3% 5% 8% 9% -55% -80% 5% 15% -29% Overseas 274.8 259.0 263.3 252.0 1,049.1 82.4 80.3 302.8 277.2 742.7 y-y (%) 13% 10% 2% 2% 7% -70% -69% 15% 10% -29% Hotel & Leisure 118.0 128.4 136.7 133.1 516.2 61.4 104.0 143.2 147.3 455.9 y-y (%) 6% 7% 8% 10% 8% -48% -19% 5% 11% -12% Seoul 34.2 42.7 41.6 45.4 163.9 6.8 27.8 42.8 48.6 126.0 y-y (%) 1% 8% 5% 7% 5% -80% -35% 3% 7% -23% Jeju 16.5 19.2 24.2 18.0 77.9 9.9 14.4 24.9 19.8 69.0 y-y (%) 1% -1% 2% 24% 5% -40% -25% 3% 10% -11% Shilla Stay 30.2 34.2 37.4 38.6 140.4 16.6 25.7 40.4 43.2 125.9 y-y (%) 5% 8% 12% 10% 9% -45% -25% 8% 12% -10% Others 3.6 1.0 3.9 1.0 9.5 2.9 0.8 4.3 1.1