Investment advice We downgraded the investment rating of China Travel Hong Kong to “neutral” to reflect its poor profitability and uncertainty about future investments. The target price was lowered to HK$2.6. The reason for the weak performance of the first half of 2016: revenue and net profit fell by 13% and 71%, respectively. Excluding the impact of one-time factors, core net profit fell 37% year on year, mainly due to 1) hotel business profit falling 24%, and the Hong Kong and Macau tourism markets remained sluggish; 2) travel agency business profit fell 37%, mainly due to adjustments in related visa policies. We expect earnings in all business segments to continue to be weak in the second half of 2016. Hong Kong China Travel Service is actively promoting the development of the Dali project and the Leshan project, and is expected to achieve a breakthrough in the second half of 2016. However, the development of new tourism projects faces great uncertainty and can drag down performance in the short term. Profit Forecast and Valuation We lowered our 2016/2017 core profit forecast by 31.8%/31.5% to HK$439 million /HK$467 million, respectively. Based on NAV analysis, the target price was lowered by 32.7% to HK$2.6. Hong Kong China Travel Service has rich asset value. The restructuring of Hong Kong China Travel Service and China Travel Group is expected to bring potential for resource integration and business synergy to Hong Kong China Travel. However, in the short term, earnings are under downward pressure. The rating was downgraded to “neutral.” The reform process for risky state-owned enterprises has been faster than expected.