Performance review

1H22 results are in line with previous profit warnings

The company announced 1H22 results: revenue -80.5% year-on-year to 258 million yuan (excluding divested park and property sales, -51.4% year-on-year); net loss of 539 million yuan, partly due to a decrease in fair value of investment properties of 53 million yuan and fixed asset impairment of 335.5 million yuan; performance was in line with previous profit warnings; 1H22 had an adjusted EBITDA loss of 165.5 million yuan. Capital expenditure for the first half of the year was about $40 billion, and interest-bearing banks and other loans as of the end of June were 5.21 billion yuan (5.19 billion yuan at the end of last year).

Main operating data and expenses: 1) Due to the repeated impact of the epidemic, the number of ticket purchasers and visitors to the park under 1H22 was -56.7% and -49.3%, respectively. Of these, Shanghai and Sanya parks only operated for 97 and 148 days (181 days for the same period in '21). 2) Considering the operating deleveraging effect of declining revenue, 1H22 administrative expenses rate +53.6ppt to 79.3%, sales expense ratio +2.8ppt to 10.3% year on year; financial expenses were -50.0% to 150 million yuan, mainly due to a reduction in interest-bearing debt at the end of last year.

Development trends

The summer park business has rebounded, focusing on the epidemic and prevention and control trends. Since June, with the domestic epidemic and the trend of prevention and control improving marginally, demand for summer travel and leisure has rebounded. The company estimates that the park sector recorded a turnover of 144 million yuan in July; of these, Shanghai Park resumed normal operation from June 12, and the number of ticket sales, visitors, and turnover in July reached about 58.8%, 60.4%, and 49% of 1H22, respectively. In August, when the epidemic rebounded in some parts of the country (the Sanya project was closed on August 2), the total number of weekend ticket sales for all parks was +118%, of which the number of tickets sold at Shanghai Park on the weekend in August was about +160% over the same period last year. We are concerned about the progress of park business recovery and profit improvement under the pandemic, as well as the pace of expansion of the new park (the Zhengzhou project is expected to open before 2024, Shanghai Phase II planning and construction progress, etc.).

Follow the progress of asset-light projects and IP business. 1) Light asset business: The first batch of 5 Haichang Oceanariums/Exploration Centers was launched in May. By the end of August, 10 companies had landed and 5 had signed contracts. The company expects to manage and operate more than 20 aquariums/exploration centers by the end of August. On 8/24, the company announced its strategic cooperation with Golden Eagle International Group. We are concerned about large-scale implementation of asset-light projects, and performance remains to be seen. 2) IP business: The Ultraman theme entertainment area was launched on 7/30, and the peak summer season in August boosted secondary consumption by visitors to Shanghai Park; the company announced a strategic cooperation with Happy Valley on 6/21 to introduce the Ultraman Super Energy Station project into 8 Happy Valley projects. At the same time, the company continues to enrich its IP reserves. In addition to its own IP, Hailing Queen, it has introduced internationally renowned IPs (such as Peppa Pig, Shawn the Sheep, and One Piece) through cooperation. We believe that the cooperation model between the company and the IP side, product sales channels, and potential revenue and profit volume have yet to be verified.

Profit forecasting and valuation

Considering the impact of the pandemic, the net loss of $320 million in 2020 was lowered to a loss of $550 million, maintaining the 23-year EBITDA and net profit forecast. It currently corresponds to 23 years and 26 times EV/EBITDA. Maintaining a neutral rating, taking into account factors such as the catalytic progress of asset-light and IP business, and the inclusion of Hong Kong Stock Connect, etc., the target price was raised by 8% to HK$5.5, corresponding to 20 times the EV/EBITDA of 23. Currently, there is 19% downside.

risks

The impact of the epidemic has exceeded expectations; project expansion and profit improvements have fallen short of expectations; public opinion risks of animal shows, etc.