The results for the first half of the year were in line with expectations Huangshan Tourism announced its first half results: operating income of 730 million yuan, down 0.9% year on year; net profit attributable to parent company was 190 million yuan, up 6.8% year on year, corresponding to profit of 0.25 yuan per share. The performance was generally in line with expectations. In the second quarter, quarterly revenue increased 5%, and operating profit increased 27%, a marked improvement over the first quarter. The number of visitors to scenic spots increased 16% in the first half of the year, but due to about 100,000 free visitors and promotional activities, ticket prices per capita fell 19% and ticket revenue fell 6%. However, the free passenger flow has led to revenue growth in the ropeway and hotel businesses. Gross margin increased significantly by 3 percentage points, and total sales and management expenses decreased by 7%, benefiting from increased business reform and effective cost control. The development trend will reach a low base in the third quarter. 3Q16 was affected by bad weather, with quarterly revenue falling 11% and net profit falling 10%. 3Q17 is expected to usher in restorative growth from a low base. Expect a “high-speed rail dividend”: the opening of the Hangzhou-Huang high-speed railway in June 2018 will drastically reduce the time from Yangtze River Delta cities to scenic spots. The opening of the high-speed rail will bring about a definite increase in passenger flow. The “reform dividend” continues: 1) In 2017, the company achieved a breakthrough in the incentive system for the first time and set up a “winning performance award” to link executive bonuses to excess profits to enhance management reform momentum; 2) the hotel sector will adopt more market-based revenue management measures, no longer set uniform prices at the beginning of the year, but dynamically adjust prices based on reservation conditions; 3) adjust marketing strategies to unify marketing in different sectors such as tickets, hotels, and ropeways to marketing center scheduling. 4) Implement the “Go Global” strategy. It is expected that the merger of Hongcun and Taiping Lake will be completed within the year. 5) The company has announced the sale of the real estate business, and is expected to sell shares in Huaan Securities in the second half of the year. Selling non-travel assets helps companies focus on their main business and reserve cash for future development. We believe that excellent management will drive long-term growth in the company's profit margin and ROE. The profit forecast takes into account the impact of the sale of real estate business and the decline in investment income. We lowered our earnings per share forecasts for 2017 and 2018 by 5% and 4% from RMB 0.57 and RMB 0.7 to RMB 0.54 and $0.67, respectively. The profit forecast does not yet include Hiromura's merger table. Valuation and recommendations Currently, the company's stock price corresponds to a price-earnings ratio of 24 times in 2018. We maintained the recommended rating, but lowered the target price by 3.85% to RMB 20.23, which is 23.05% higher than the current stock price. The target price is based on a price-earnings ratio of 30x in 2018. Risk: Bad weather and other causes have a negative impact on tourist flow.