Abstract: the company's strong net profit performance in 2017 was mainly due to the steady growth of its core business and one-off gains during the period. Looking ahead, under the leadership of the new management team, in addition to core business improvement, the company is expected to release more asset value in 2018. Investors can focus on the progress of the sale of Hong Kong assets and the contribution of Zhuhai Haiquan Bay property. The company is also gradually shifting to new business directions, such as the layout of light-asset businesses and mergers and acquisitions. The company aims to achieve double-digit profit growth by 2018. If this goal is met, the company's 2018 price-to-earnings valuation of 14.6 times earnings will not be expensive. The company has the opportunity to sell its office in Mong Kok (estimated value: HK $1 billion), which may serve as a catalyst in the short term.
Review: the new management delivered strong results in 2017. In the second half of the year, the company continued its strong momentum in the first half, with full-year results recovering strongly, with full-year net profit up 226% year-on-year to HK $1.148 billion, reflecting the efforts of the new management team, mainly appointed in 2016, to improve operations and release asset values. The strong profit growth may be attributed to a low base in 2016, including the following factors: (1) profits in 2016 fell 74% from the same period in 2015 compared with the same period in 2015. because the 2016 performance no longer reflects the performance of the power plant business (the business ceased operation in 2015); (2) the Xianyang Haiquan Bay project recorded an one-time impairment of HK $116.6 million in 2016.
Excluding the low base effect, the overall core business rebounded steadily in 2017, with the hotel business unit having the best performance, with net profit up 34% year on year, mainly due to the recovery of Hong Kong's tourism industry and hotel market. The company also recorded sales of HK $586 million on property projects in Angie and Zhuhai, but made a modest profit in 2017 (only about HK $5 million). At the same time, the company recorded an one-time after-tax income of about HK $560 million, mainly due to the closure of the Hong Kong China Travel Service Juhao Golf Club business, which accounted for a large part of profit growth in 2017.
The core business is accelerating. In 2016 and 2017, CTS introduced a new management team. 2018 will be the first full year for the new team to demonstrate its ability to enhance its existing business.
With regard to the tourist attractions in mainland China currently owned by the company, as the domestic tourism demand is expected to remain stable in 2018, the management expects its endogenous growth to be visible, and CTS Hong Kong has been introducing new measures for potential assets. This is especially applicable to the Songshan Scenic spot in Henan Province. According to the management, the passenger flow of Songshan may be comparable to that of similar competitors such as Huangshan Tourism [600054.CH] or Emeishan [000888.CH]. However, due to the lack of tourism transportation and accommodation facilities in Songshan, the per capita tourism income of Songshan is significantly lower than that of the same industry. The company is currently upgrading the scenic spot and will provide more transportation services in the future.
As the company launches an equity incentive scheme, other existing businesses are also transforming. The company's light assets business will be the focus and is expected to improve the overall profit margin and return on net assets. The management consultation of third-party tourism projects is an example of this initiative. In addition, Tianchuang International Performing Arts production Exchange is the creative planning platform of CTS, which continued to make good progress in early 2018 after revenue increased 113% year-on-year to HK $130 million in 2017.