The continued impact of the epidemic in 2022 led to large losses. Operating data for the first two months of 2023 showed that the company's theme park business recovery was ahead of the industry. We are optimistic about the performance recovery that will be brought about by the recovery in passenger traffic this year, as well as the increase in revenue brought about by putting new projects into operation and asset-light business layout. At the same time, during the epidemic, the company adjusted its strategic direction and optimized asset structure, which is conducive to the release of post-epidemic performance. It is recommended to continue to pay attention to the company's subsequent new business layout and implementation.
The pandemic has repeatedly affected operations, and the divestment of parks has reduced the scale of revenue. The company's revenue in 2022 was 793 million yuan/ -67.8% (excluding the impact of divestment of the park business and property sales, revenue fell 23.7% year-on-year), net profit of -1,396 million yuan (vs. +834 million yuan in 2021), and adjusted EBITDA was -423 million yuan (+527 million yuan in 2021), in line with previous profit warnings. Under the influence of the pandemic, the company's pillar business theme park operations were restricted. Combined with the divestment of some theme parks in October 2021 (total revenue contribution of 837 million yuan in 2021), the company's revenue scale dropped drastically in 2022, while the cost of asset-heavy theme parks was rigid, causing the profit side to record large losses.
Shanghai Park is leading the recovery, and the Zhengzhou Project Company is expected to open this year. The park's operating revenue in 2022 was 749 million yuan/ -58.9%. Among them, tickets/food and drinks/goods/rental/park amusement charges/hotel operating revenue accounted for 46.5%/3.2%/11.3%/13.4%, respectively. The year-on-year changes of -17.1/+5.6/+2.6/-1.0/+2.3/+7.6pcts were mainly due to the decline in the proportion of group visitors affected by the epidemic. The impact of the epidemic in 2022 was severe. Shanghai Park was only open for 280 days (vs. 289/364 days in 2020/2021, respectively). The park business rebounded rapidly after the epidemic control policy was liberalized, and the number of theme park visits/turnover in January-January 2023 recovered to 114%/118% of the same period in 2019, respectively. Among them, the recovery of the Shanghai project took the lead. The number of entrants/turnover in January-January 2023 recovered to 151%/130% of the same period in 2019, respectively. Furthermore, the first phase of the Zhengzhou project is expected to open in 2023H2, and the second phase of the project company is expected to open in 2024. The project area of the Zhengzhou project is vast (more than 40% of the area of Shanghai Park), the radiation population is large (the two-hour traffic circle covers 450 million people), and the revenue contribution of the second phase of the project may exceed 1 billion yuan after maturity.
The asset-light layout is progressing steadily, and the IP strategy has established a new development engine. The revenue of cultural tourism services and solutions in 2022 was 44.05 million yuan/ -15.0%, mainly due to low project delivery during the pandemic. The company launched an asset-light project for boutique aquariums. In 2022, it received 520,000 visitors and generated revenue of about 23 million yuan. By the end of March 2023, 18 aquariums had been operated in 18 cities, and 20 were in the negotiation stage, and more than 20 were in the contract stage, making steady progress towards the goal of 100 aquariums in the medium term. In addition, the company's new product system Children's Ice and Snow Center project will launch its first project in Shenzhen in April 2023. The project also has the potential to be replicated off-site. The company established an IP development strategy and introduced high-quality IP to empower parks and asset-light businesses to increase passenger flow and secondary sales. In July 2022, the world's first Ultraman-themed entertainment zone was launched in Shanghai Park, showing strong passenger flow appeal and consumer cluster effects during the summer season. The opening of the Ultraman Hotel in January 2023 further promoted the recovery of consumption in Shanghai Park. At the same time, the company is also actively expanding other landing channels. In the future, in addition to collaborating with the company's own parks, IP theme pavilions are also expected to land in other scenic spots, parks, shopping malls, etc., to expand consumption scenarios and enhance monetization potential.
Expense rates have increased under the pandemic, and financial expenses have continued to decrease. In 2022, the company's comprehensive gross profit margin was -35.1% /-64.5pcts, sales expense ratio 10.7% /+1.5pcts, management expense ratio 76.5% /+29.9pcts, and financial expense ratio 39.7% /+19.8pcts. In the context of a sharp decline in revenue, gross margin was burdened, and management expenses and financial expense ratios increased significantly. However, looking at absolute values, management expenses of 606 million yuan/ -47.2% in 2022 were related to the divestment of some parks; financial expenses of 315 million yuan/ -35.7% in 2022 were related to a reduction in interest-bearing debt.
With the optimization of capital structures and the expansion of asset-light projects, we judge that financial expenses are expected to remain at a reasonable level in the future.
Risk factors: Macroeconomics was weaker than expected; park passenger flow and secondary consumption growth fell short of expectations; asset light business expansion fell short of expectations; IP business development fell short of expectations; and the opening of the project in Zhengzhou came later than expected.
Profit forecasts, valuations and ratings: Theme park operations were limited under the impact of the 2022 pandemic, which dragged down performance. After the release of the epidemic control policy, the company's theme park business recovered in leading industries. The recovery of the Shanghai project was particularly impressive. The boutique aquarium project progressed steadily. The company expects the Zhengzhou project to open in the second half of this year, and at that time, the project will become the company's important layout in the Central Plains region. Looking at the medium to long term, Haichang Ocean Park, as China's largest marine theme park operator with a national layout, has the highest biological resource holdings in Asia, leading the world in biological conservation capacity, and is already a core city. It has strong operation and management capabilities throughout the theme park process, and has abundant resources and operating barriers, and will continue to benefit from the recovery of the tourism industry. Looking ahead, the growth potential of the new Zhengzhou Park and Shanghai Park Phase II is quite impressive, and asset-light and new retail businesses are expected to develop by leaps and bounds. Considering the start-up costs of the Zhengzhou project, we adjusted the 2023 net profit forecast to 100 million yuan (the original forecast was 143 million yuan), maintained the 2024 net profit forecast to 423 million yuan, and added the net profit forecast for 2025 to 544 million yuan. Since the company is in the stage of high growth expectations after strategic transformation, Songcheng Performing Arts and Tianmu Lake, which have relatively high growth expectations among leisure attractions, were selected as comparable companies, the company's 2024 dynamic PE average was 27x (based on the forecast of the CITIC Securities Research Department), but considering that the company's 2023-2025 performance growth forecast was faster than that of comparable companies, and that asset-light and IP-related businesses had great potential for growth, Haichang Ocean Park was given a “increase in holdings” rating for the first time, corresponding to the target price of HK$1.8.
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