Profit is predicted to increase by more than 200% year-on-year
China Travel Hong Kong announced a profit forecast. Net profit is expected to increase by more than 200% year-on-year in 2017, far exceeding unanimous expectations. Strong earnings growth was mainly due to core business growth and one-time asset disposal proceeds.
Key points of interest
Management incentive mechanisms have been improved. Since taking office in 2016, the new CEO has proposed new business goals, ROE targets, core profit growth targets, and management incentive mechanisms. We believe these measures are expected to motivate the company's executives and drive the company's future development.
It is expected that the company will divest inefficient assets and increase shareholder returns. We estimate the value of the company's property assets to be close to HK$15 billion. If the company sells its assets, it is expected that a special dividend will be paid.
The company's core profit is expected to continue to grow, mainly benefiting from: 1) the recovery of Hong Kong's hotel business; 2) tourism real estate development; and 3) the improvement of employee incentive mechanisms.
Valuation and advice
Keep the profit forecast unchanged, and make adjustments after the official announcement of the results.
Currently, the company is trading 16 times the 2018 core price-earnings ratio. Maintain the recommended rating and target price of HK$3.88, corresponding to an upward margin of 44.8%. Our target price is based on the segment plus total valuation method.
risks
The reform of state-owned enterprises fell short of expectations.