Performance review

Maintain to outperform the industry

1H19 performance is lower than we expected.

The company announced 1H19 results: operating income of HK $2.22 billion, an increase of 6.8% over the same period last year; net profit of HK $419 million, up 10.7% year-on-year; and earnings per share of HK $0.08. The interim dividend is 3 Hong Kong cents per share, with a dividend rate of 39%. The decline in the profitability of the company's core scenic spots is mainly due to the decline in the profitability of leisure scenic spots and passenger transport business, resulting in a performance lower than we expected.

1H19 revenue returned to positive growth: 1) the revenue of leisure resort scenic spots was + 11.9% compared with the same period last year, and the net profit was-49% compared with the same period last year, mainly due to the decline in the profit carried forward by Evergrande Haiquan Bay real estate business and the expansion of losses in Xianyang Haiquan Bay. 2) the revenue and profits of travel agencies are + 11% and 6% respectively compared with the same period last year, benefiting from the increase in the volume of certificate business. 3) the completion of the 4Q18 Hong Kong-Zhuhai-Macao Bridge and the increase in the number of tourists to Hong Kong led to + 12% of the revenue of passenger transport business compared with the same period last year. However, the increase in car rental, labor costs and maintenance costs has led to a profit of-94% compared with the same period last year. 4) it is planned to transfer the travel agency business (excluding travel document business) to the sibling company China Travel Service.

1H19 financial analysis: 1) the gross profit margin decreased by 0.3ppt to 45.6% compared with the same period last year, which is basically stable.

2) expenses are well controlled, sales expenses and management expenses are 0.5% lower than the revenue growth rate, respectively, and the operating profit margin is increased by 8.5ppt to 25% compared with the same period last year.

Trend of development

Since the release of the 2018 annual report, the company's share price has fallen sharply, mainly due to the non-dividend at the end of 2018, superimposed by the downward adjustment of tickets to state-owned scenic spots. 1H19 resumes revenue growth and pays dividends again in the medium term, alleviating the negative factors in the early stage. The superimposed company is spinning off its loss-making travel agency business, and we still maintain an industry rating that outperforms.

On August 23, the State Council issued the "opinions on further stimulating the consumption potential of Culture and Tourism", which will continue to promote the reduction of tickets to state-owned scenic spots. The market is worried that the policy is not conducive to the company's scenic spot business. In addition, we expect the company's hotel business and passenger transport business to be affected.

Profit forecast and valuation

Due to the lower-than-expected performance, the 2019 go 20e EPS forecast was lowered by 4% to HK $0.14 / HK $0.14. The current share price corresponds to 8.8x/8.5x 2019 Universe 20e Pmax E. Maintain its outperforming industry rating and cut its target price by 25 per cent to HK $1.57, corresponding to 12x/11x 2019/20eP/E, which has 31 per cent upside from the current share price.

Risk.

The risk of business policy adjustment; the risk caused by the downward adjustment of tickets in state-owned scenic spots.