Abstract: As the new management team takes over China Travel Hong Kong, the company will develop new strategies and business directions to promote the high profitability and shareholder returns of China Travel Hong Kong [0308.HK, unrated]. The company has a rich portfolio of hotels and properties, but its value is overshadowed by book value, and the company is planning to release value through the sale of non-core assets. Furthermore, the catalysts for core business are also beginning to respond, particularly the tourist real estate project in Zhuhai. Therefore, the company's overall strategy is to obtain profits through the sale of non-core assets, thereby buying time, and reallocating resources to develop the tourism business to generate recurring revenue. Although it remains to be seen whether the company can improve its long-term profitability, the current net market ratio of 0.95 times is still not that expensive. Taking into account the market value of the asset, we estimate the adjusted net book value of the asset to be HK$3.41 per share, representing a potential rise in stock prices of 29.3%. In a favorable business environment, the current business showed a recovery. After Hong Kong China Travel Service recorded a 74% year-on-year decline in net profit in 2016, the performance of the first half of 2017 rebounded strongly. The weak performance in 2016 was mainly due to the cessation of profit contributions from the power plant business that ceased operations and one-time sales revenue. The company's revenue for the first half of 2017 increased 29% year over year to HK$2,352 million, while diluted earnings per share increased by 40.2% year over year to HK6.87 cents, which is in line with the improvement in the Hong Kong and Mainland tourism markets. In the third quarter of 2017 and Golden Week, the number of visitors to Hong Kong and mainland travel spending maintained a good trend. The core business of China Travel in Hong Kong benefited as a result, which should help operating profits to recover. The efforts of the new management team will take time to bear fruit. Since September 2016, there have been major changes in the management of China Travel Service in Hong Kong. Zhang Fengchun was appointed as the new chairman in October 2016. Zhang Xing, Liu Fengbo and Chen Xianjun were appointed as new executive directors in February 2017. Previously, some senior management had other responsibilities in parent companies, which may have affected their working hours in listed companies. This fundamental change in management structure is aimed at increasing the responsibilities of senior management in listed companies and encouraging them to invest more time in listed companies. It is worth noting that Hong Kong China Travel Service has adopted a share option scheme for employees. The latest exercise price is HK$2.304. I believe the new management team will be more motivated to further improve business performance. Short-term: Unlock the value of non-core assets. Strengthening the existing asset portfolio is one of the main goals of the new management team. In the short term, the new management team plans to unlock the value of the company's assets. As a red-chip company with a 25-year listing history, China Travel Hong Kong's property, plant and equipment (PP&E) covers a broad portfolio of Hong Kong properties. These assets are priced at cost, and unlike investment properties, they do not reflect their market value. Since these properties have greatly appreciated in value over the years, Hong Kong China Travel Service is planning to sell them to reflect their value. PP&E: Asset disposal matters for 2018. China Travel Hong Kong has just clearly announced its Hong Kong asset disposal plan: (1) sell a commercial property with an estimated value of HK$1 billion in Mongkok; (2) move the Central office to other regions and sell some of the offices; and (3) convert the Hung Hom warehouse into serviced apartments. Although these deals have yet to be finalized, the property in Mongkok is likely to be sold in the first quarter of 2018, which we believe will contribute up to HK$900 million in sales revenue. Hotels: hidden value. The hotels operated by the company are also recorded in PP&E, and it is currently estimated that their market value has also increased significantly. Although the company has no firm plans to release the value of these hotel assets, management does not rule out the possibility of capital operations, such as sale and leaseback with the help of the parent company. Our preliminary estimates suggest that China Travel Hong Kong's hotel assets may have significant potential for revaluation. At the end of 2016, the hotel's net book value was HK$3.139 billion. Referring to the value of some hotel operators focusing on Hong Kong business, we estimate that the value of each hotel room in hotels owned by Hong Kong China Travel Service can be as high as HK$5 million. Therefore, the total valuation of the company's hotel portfolio can reach HK$9.655 billion. However, the historical cost of the hotel package was HK$5.643 billion. If compared with fair value, this is a much more conservative estimate, a discount of about 40% from the market value of HK$9.655 billion. Regardless, China Travel Hong Kong has plenty of room to unlock the value of its hotel portfolio and enhance shareholder value. Zhuhai Haiquan Bay Project: To be recorded in 2018. The first phase of the project was jointly developed by China Travel and Evergrande in Hong Kong. As the local real estate market improved, the prospects for the project also became more positive in 2017. The first phase of the project has a total construction area of about 240,000 square meters, and the average sales price is close to 10,000 yuan. China Travel Hong Kong holds 49% interest in the first phase of the project, which is expected to be delivered by the end of 2018. The first phase of Haiquanwan in Zhuhai is estimated to bring huge one-time benefits to the company in 2018. Since the gross margin of China Evergrande is usually around 30%, and the profit margin before interest and tax is about 15% to 20%, it is estimated that Hong Kong China Travel can account for HK$200 million to HK$300 million under the “Joint Venture Company” in 2018. Long-term: Asset improvement, increased incentives, and reallocation of resources to the tourism business. With a strong shareholder background, Hong Kong China Travel has high-quality tourism assets in Hong Kong, Macau and the Mainland. However, due to the better incentive system of its competitors, the asset performance of China Travel in Hong Kong is inferior to that of its A-share listed peers. In order to solve this problem, Hong Kong China Travel Service has set up a new dividend incentive plan for the business department, so that managers can share more profits without limit. More initiatives have also been introduced as a result. For example, the Songshan Scenic Area will have new tourist transportation and tourist hubs, and provide services with high profit margins. Since all local governments welcome PPP investment in the tourism industry, Hong Kong China Travel Service will also use its parent company background to explore opportunities in various provinces. With a strong balance sheet and potential cash flow from the sale of non-core assets, the company has abundant resources to acquire tourist attraction projects and explore PPP investment opportunities in the tourism industry. For example, in April 2017, Hong Kong China Travel and Tourism reached a strategic framework agreement with a Hebei state-owned enterprise to jointly develop tourism resources in the Beijing-Tianjin-Hebei region. Overall, the company will sell non-core assets over the next two years, creating better returns for investors. This will help the company buy time and allow management to reallocate resources to the tourism business, and will bring stable returns to investors in the medium term. The balance sheet is sound, and there is room for special dividends. As at the end of the first half of 2017, Hong Kong China Travel's cash and cash equivalents were HK$2.86 billion, and financial assets of a nature close to cash were HK$1.8 billion. As a result, the actual net cash held by the company was HK$4.53 billion, or HK$0.58 per share. The company's huge net cash holdings will help the company finance projects in the future without the need to increase debt. On the other hand, given the company's emphasis on increasing shareholder returns, the huge amount of cash is likely to be used to buy back stocks and distribute special interest. Beginning with the 2014 interim results, the company has paid special interest, and management does not rule out the possibility of allocating special interest in the future. We believe that the special interest payout ratio is expected to increase after the company completes the sale of the Mongkok property. Valuation: Expected to catch up. Shares have been revalued by the market since the company announced strong interim results in '17. Due to the positive outlook for the Hong Kong and Mainland tourism markets, and the company's new management team's efforts to improve shareholder returns, it is expected that Hong Kong China Travel Service will receive a further revaluation. According to Bloomberg's consensus forecast, Hong Kong China Travel's current forecast price-earnings ratio for 2018 is close to 20 times. The company's earnings per share forecast for 2018 is expected to be further revised, mainly due to one-off projects: (1) sales revenue of Mongkok properties, estimated after-tax earnings may reach HK$747 million; (2) profit recorded from the first phase of the Zhuhai Haiquan Bay Project. In addition, the valuation of a company can also be viewed from the perspective of net market ratio. As the market continues to revalue its assets, the current net market ratio of China Travel in Hong Kong is 0.95 times. The company's current book value does not reflect the latest value of its Hong Kong real estate holdings. We estimate the adjusted book value (taking into account the potential growth of the hotel portfolio and Mongkok properties) to be HK$3.41 per share, which is 29.3% higher than the current share price