Investment suggestion

We downgraded the company to neutral, downgraded its 2020 profit forecast to HK $140 million, lowered its 2021 EPS forecast by 45 per cent to HK $0.08, and lowered its target price by 25 per cent to HK $1.067. The reasons are as follows:

The 2019 performance was lower than we expected: operating income of HK $4.477 billion, year-on-year of-1%, and net profit of HK $387 million, or-44% of the same period last year, and HK $0.07 per share. Corresponding to 2H19, the operating income was HK $2.257 billion,-7.5% compared with the same period last year, and a loss of HK $33 million. If there is no dividend at the end of the period, consider the interim dividend, with a dividend rate of 43% in 2019. The company's performance was lower than we expected, mainly due to a significant decline in hotel, passenger and travel agency profits and a decrease in Evergrande Haiquan Bay carry-over real estate profits in the current period.

We expect that the COVID-19 epidemic will lead to the company's loss in 2020: 1) in 2019, the company's operation will be negatively affected by the significant decrease in passenger flow from the mainland to Hong Kong. 2) under the influence of COVID-19 's epidemic in 2020, part of the company's business in the mainland and Hong Kong was suspended, and most of its business was adversely affected. The company's core visa business from Hong Kong to the mainland, Shenzhen window of the World and Shenzhen Splendid China were also affected by the epidemic. We expect the company to lose money in 2020.

We expect that it will take a long time for the company to return to normal operation: 1) in order to prevent the second spread of the epidemic in China, some scenic spots in the mainland will suspend business again after opening. 2) Hong Kong has close ties with overseas, and epidemic control is greatly affected by overseas outbreaks.

What is the biggest difference between us and the market? The market thinks that the market value of the company is significantly lower than the book value of net assets, but we believe that the company, as a state-controlled enterprise, will not be privatized, and net assets have no reference significance when the industry is depressed.

Potential catalyst: better than expected in 2020.

Profit forecast and valuation

Due to the decline in the profits of the company's core business, the superimposed epidemic has a great impact on the company, so we downgrade the company to neutral. It lowered its 2020 profit forecast to a loss of HK $140 million and its 2021 EPS by 45 per cent to HK $0.08. The current share price corresponds to a price-to-earnings ratio of 13 times 2021. The target price is cut by 25 per cent to HK $1.067, corresponding to 14 times 2021 earnings and 10 per cent upside from the current share price.

Risk

The negative impact of the epidemic on the tourism industry exceeded expectations.