Key points of investment
1. One-sentence logic
A leading “theme park+cultural entertainment” leader. Customization drives customer unit prices to increase, occupancy rate recovery drives the number of heavy assets to exceed expectations, and net interest rates increase; new projects have opened up a growth center, and growth has exceeded expectations.
II. Logic that exceeds expectations
1) Phased implementation of flower house depreciation, with more emphasis on main business management
Market expectations: Not all depreciation of Huabang has been completed, affecting forward profits.
We forecast:
Affected by factors such as the decline in the prosperity of the online entertainment+live streaming industry, the company has already calculated asset impairment losses on Huafang. The company's shareholding ratio is 35.35%. According to the income method, the valuation of Huafang Group is close to its net assets. After the impairment, Huafang Group's valuation is close to its net assets. It is expected that after Huafang resumes trading, the probability of further impairment of the company's remaining long-term investment is low.
Regarding the freezing of funds, on July 3, 2023, Huafang Group paid 155 million yuan of pending seizure to the relevant authorities. As of July 25, 2023, all of Huafang Group's frozen fund accounts have been unfrozen and can be used for normal commercial operations. Since then, Huafang Group's financial accounts and funds have not been frozen. It is expected that Huafang Group is less likely to be required to increase the amount of seizure and fines awaiting settlement in the future.
2) Under the trend of tourism recovery, new projects are expected to continue to contribute to growth market expectations: it is believed that the company has limited space to expand projects, the volume of new projects is small, and the life cycle of existing projects is relatively short.
We anticipate:
In terms of the number of heavy assets, 2024Q1's recovery has exceeded expectations. According to the Songcheng Performing Arts website, as of March 11, 2024, the number of heavy assets has been 1,418 since the beginning of the year, which is +248.4% compared to 2023 and +69.0% compared to 2019. The number of light assets was 167, -1.8% compared to 2023 and -13.9% compared to 2019.
Individual projects, such as Xi'an, Foshan, and Shanghai, have impressive performance data for the first quarter. Revenue is expected to exceed expectations, and the whole year is expected to level out or be profitable. The asset-light Three Gorges project is expected to open at the end of July. H1 is expected to confirm most of the asset-light revenue, which is expected to make a positive contribution to the first and second quarter. The Jiuzhai project is expected to open in mid-late March. Zhangjiajie was affected by competition and is still recovering.
III. Inspection and Catalysis
Industry-side travel demand has exceeded expectations, new projects have climbed faster than expected, Huafang's progress has accelerated, passenger traffic has exceeded expectations, and passenger unit prices have continued to rise.
IV. The value of research
A different understanding: The market is worried that there is an upper limit on the profit of existing projects in Songcheng, there is uncertainty about the success rate of new project expansion, and the depreciation of housing has a certain impact. However, we believe that Huafang is progressing relatively positively, and if subsequent depreciation is calculated at once, it will have little impact on long-term profits. The opening of the company's new projects in Foshan and Shanghai will contribute to growth, and asset-light projects continue to advance and expand; the overall number of seats continues to expand, and the occupancy rate is expected to continue to increase; the recovery of group visitors will accelerate, and retail customers will boost profits.
5. Profit forecast and valuation
On 23/24/25, the company's revenue is expected to be 19.63/28.74/3.270 billion yuan, +328.70%/+46.43%/+13.78% year over year, net profit to mother of 1.76/13.48/1,709 billion yuan, +665.24%/+26.79% year-on-year in 24/25, corresponding to PE 160X/21X/16X in 23/24/25.
6. Target price and space
The average PE of comparable companies in 2024 was 27X. Taking into account the growth and future space of Songcheng performing arts, a PE valuation of 30 times 2024 was given, corresponding to a target market value of 404 billion yuan and a target price of 15.43 yuan/share. Currently, the corresponding upward space is about 40%.
7. Risk Factors
Consumption recovery falls short of expectations, competition increases risks, and natural disasters.