1H24 results slightly below our expectations

Shangri-La (Asia) announced 1H24 results. 1) Financial data: 1H24 revenue also increased 4% to 1.049 billion US dollars, with hotel properties increasing 4% to 0.936 billion US dollars, and investment properties increased 14% to 59.73 million US dollars (mainly due to the opening of the Fuzhou Shangri-La Phase II office building and commercial section in 2H23 and 1H24, and the increase in rents for investment properties in Mongolia and Sri Lanka while maintaining occupancy rates).

EBITDA (including associated companies) fell 4% to $0.382 billion (the hotel property sector also fell 8% to 0.221 billion US dollars, and the investment property sector also increased 2% to 0.147 billion US dollars). The company's net profit to mother decreased by about 28% to 0.095 billion US dollars. The overall EBITDA margin of 1H24 is about 24.0% (1H23:26.4%), and the EBITDA margin including associated companies is about 30.0% (1H23:32.3%). 1H24's performance was slightly lower than our expectations, mainly due to the opening of a new JEN Hotel in Kunming and rising employee costs, which in turn lowered EBITDA. 2) Operating data: 1H24's overall RevPar increased by about 1% to $104 (ADR decreased by about 1%, OCC increased by about 1ppt), and Hong Kong, China/Mainland China/Singapore RevPAR was +11%/-1%/-2%, respectively. 3) Dividends: 1H24 declared an interim dividend of HK5 cents per common share.

4) Asset and liability structure optimization: As of 1H, RMB loans accounted for about 46% of the total loan amount (end of 23:26%), and the annualized interest rate for 1H loans fell slightly to 4.45% month-on-month (1H 23:4.26%; 2H 23:4.54%).

Development trends

The 1H24 Mainland China RevPAR fell by about 1%. In the first half of the year, the overall RevPAR increased by about 1% (recovered to about 95% in the same period in '19), and the mainland China RevPAR decreased by about 1% (OCC increased by 1ppt, ADR decreased by 2%), and recovered to about 90% in the same period in '19. The performance of 1H cities in mainland China is divided: first-tier cities RevPAR increased by about 3% (OCC increased by 2ppt, ADR is almost flat), mainly due to the continued recovery of inbound tourists (statistics from the State Administration of Immigration showed a 1H increase of 152.7% to about 14.635 million, returning to about 61% in the same period in 2019; the China Institute of Tourism Research predicts that the number of visitors entering foreign countries in 24 may return to about 80% or more in 2019); the RevPAR of second-tier cities remained flat year on year, 3. RevPAR in fourth-tier cities declined by about 6% due to higher base numbers, outbound travel diversion, etc. (OCC increased by 1 ppt, ADR decreased by about 10%). At the same time, the company mentioned that China's outbound travel will grow or be beneficial to Southeast Asia and other regions, and suggests focusing on the two-way catalysis brought about by the resumption of entry and exit in the second half of the year.

The RGI Index shows that operations are better than peers; focus on the new model of dual-brand store expansion. 1) STR shows that 1H24's own hotel RGI (Revenue Revenue Index) is 102.3, and mainland China is 107.3. The operating performance is more outstanding than other hotels of the same type in the same market. 2) Kunming JEN Hotel opened in April. The property uses a dual brand model, where about 80% of the rooms are JEN brand and 20% are Shangri-La brand (the company plans to open in '25). In addition, the Hongqiao Airport project also plans to adopt a dual brand strategy (Shangri-La brand and Trader brand). The company plans to open around the end of '24. It is recommended to focus on the operating results of the new model of dual brand store expansion.

Profit forecasting and valuation

Considering the increase in costs such as opening new projects and recruiting employees, we lowered our 24/25 EBITDA (including associated companies) by 14%/15% to USD 0.812/0.843 billion; we maintained our performance rating and lowered our target price by 16% to HK$6.3 based on a downward shift in the industry valuation center, corresponding to 9/8x 24/25e EV/EBITDA (including associated companies) and 30% upward space. The current stock price corresponds to 8/7x 24/25e EV/EBITDA (including associated companies).

risks

The recovery in consumption power fell short of expectations; the recovery of entry and exit fell short of expectations; and the progress of construction projects under construction fell short of expectations.