Investment suggestion
Raise Jinjiang A shares to recommended, target price by 44% to 38.31 yuan, Jinjiang B shares to recommended, and target price by 60% to $3.77. The reasons are as follows:
The industry fully recovered and accelerated further in the third quarter: according to the channel data of Huazhu and Home, the growth rate of RevPAR in the third quarter with a high base significantly surpassed that of the second quarter. Benefiting from economic recovery, supply integration and consumption upgrading, the hotel industry is entering a stage of overall prosperity. We believe that the industry has just entered the starting point of a new cycle and that long-term high growth is sustainable. (for detailed industry analysis, please refer to our July 26 report "looking for $10 billion in China Hotel leaders").
The potential for profit improvement is the greatest: Jinjiang has the largest number of hotels, but the net profit per store in the first half of the year is only 60,000 yuan, only 35% and 77% of that of Huazhu and Home. The net profit of Jinjiang (former brand) declined in the first half of the year, mainly due to the closure and renovation of some direct-operated hotels and medium-grade upgrades; the single-store profit of Platinum Tao was significantly lower, but Platinum Tao RevPAR has seen double-digit growth this year. On the positive side, with the promotion of mid-range upgrading and the reduction of non-operating expenses, Jinjiang's net profit growth will begin to accelerate.
The reform of state-owned enterprises is expected to exceed expectations: in June, Jinjiang became one of the four first pilot units in Shanghai to reform employee stock ownership in state-owned enterprises. The management of the company is also actively learning from the private mechanism and promoting the brand business department system internally. The potential reform of state-owned enterprises is expected to improve the operating efficiency of the company.
Valuations are the most attractive: Jinjiang A shares and B shares trade at 23.3 times and 11.7 times 18-year earnings, while Huazhu and Touyi trade at 29.4 times and 29.0 times earnings.
What is the biggest difference between us and the market? We believe that the recovery of the hotel industry is sustainable and have greater confidence in Jinjiang's potential for performance improvement.
Potential catalysts: continuous improvement in monthly RevPAR data; rapid performance growth in the third quarter; progress in state-owned enterprise reform.
Profit forecast and valuation
Taking into account the strong industry and corporate recovery trend, increase net profit in 2017 and 2018 by 11% and 29% to 940 million and 1.22 billion yuan. Upgrade the rating to recommended. Taking into account the valuation switch and the overall upward valuation of the sector, the A share price is raised by 44% to 38.31 yuan, based on 30 times 18-year price-to-earnings ratio, and the B-share price is raised by 60% to $3.77, based on 20 times 18-year earnings ratio.
Risk.
The risk of macroeconomic fluctuation; natural disasters affect tourism travel.