2017 performance in line with expectations
China Travel Service of Hong Kong announced its 2017 results: operating income of HK $4.909 billion, up 20.7% from the same period last year, while net profit after deducting HK $1.106 billion, up 167.5% over the same period last year. The results are in line with the previous forecast.
Tourist attractions business: revenue increased by 34% and profits increased by 508%, mainly due to effective cost control measures, income from the disposal of golf clubs (HK $560 million after tax) and tourism real estate development.
Hotel business: revenue increased by 5 per cent and profits increased by 34 per cent, thanks to the recovery of tourism in Hong Kong and Macau (hotel occupancy rose 7 per cent and average room rates rose 7 per cent).
Trend of development
Management incentive improvement. Since 2016, the company has put forward new ROE targets, core profit growth targets and management incentives. 2017 is the first year of the implementation of these new measures, and the company has achieved satisfactory results.
The company is expected to dispose of inefficient assets to boost shareholder returns. If the company sells assets, we expect it to pay a special dividend.
Core earnings growth is expected to remain strong, thanks to 1) the recovery of the hotel business in Hong Kong and Macau; 2) tourism real estate development; and 3) more effective employee incentives.
Profit forecast
Taking into account the strong growth of tourist attractions and tourism real estate business, we raised our 2018 net profit forecast by 42 per cent to HK $1.288 billion. At the same time, we introduce a net profit forecast of HK $1.498 billion for 2019.
Valuation and suggestion
At present, the company's share price corresponds to 12 times 2018 earnings and 11 times 2019 earnings.
We maintain our recommended rating, but due to the impact of higher earnings forecasts and lower valuation multiples, we raise our target price by 13.6% to HK $4.41, which is 51.5% higher than the current share price. Our target price is based on the classification and summation valuation method.
Risk
The reform of state-owned enterprises fell short of expectations.