1H20 performance is lower than we expected.
The company announced 1H20 results: operating income of HK $571 million, down 74.3% from the same period last year; loss of HK $443 million, down 205.7% from the same period last year; due to interim performance losses, the company did not pay dividends. The company's performance was lower than we expected, mainly due to the impact of the epidemic, resulting in losses of all core businesses that exceeded our expectations.
Affected by the epidemic, 1H20's core businesses have lost money: 1) 1H20's overall tourism destination business revenue of 366 million Hong Kong dollars, year-on-year-72%; loss of 180 million Hong Kong dollars. Among them, the revenue of the company's hotels, theme parks, natural scenic spots and leisure resort scenic spots were-66%, 82%, 79%, 64%, respectively, compared with the same period last year, with a loss of HK $0.71, 0.39 and 0.34 billion respectively. 2) since January 27, the Ministry of Culture and Tourism has suspended all outbound group travel business. 1H20's travel agency and visa-related business revenue is-75% year-on-year, with a loss of 35 million yuan. So far, outbound group travel business has not yet resumed. 3) under the influence of the epidemic, the cross-border passenger transport business of CNAC was completely suspended in the first half of the year, with revenue of-82% compared with the same period last year and a loss of HK $120 million.
Financial analysis: 1) there is a sharp decline in each business, but there are still rigid costs, resulting in negative 1H20 comprehensive gross margin. 2) the fee during the period is somewhat rigid, and the fee during the 1H20 period is-20.5% compared with the same period last year, which is significantly lower than the decrease in income. 3) the company's cash position is good. As of 1H20, cash and bank balances were HK $2.55 billion, after deducting various borrowings of HK $355 million, net cash of HK $2.19 billion.
Trend of development
The recovery of the company's business has yet to be restored by the industry as a whole. In addition, we believe that the recovery of the Hong Kong region is critical, which is related to the company's passenger transport and visa business. We expect the company to still record a loss in the second half of the year.
Industry trough, the company continues to actively promote the transformation of natural scenic spots to leisure scenic spots. On July 28, the night project "wonderful Night Detian" of Detian Falls was officially put into operation, creating a night lighting performance show, and the cross-border duty-free street project between China and Vietnam has also been opened; Shapotou Scenic spot continues to promote the construction of Star Hotel Bed & Breakfast project, and the company plans to open the first phase in 2H20, which will enrich leisure and holiday products such as hot springs, accommodation, hotels, performing arts and night excursions in the future. The company plans to develop tourism vacation and real estate projects in Jintang County, Sichuan Province, and has obtained the relevant land use rights on May 8.
Profit forecast and valuation
We expect the tourism industry in Hong Kong to decline sharply in the second half of the year, reducing net profit in 2020 to-HK $603 million and net profit in 2021 by 17.7% to HK $347 million.
The current share price corresponds to 19.1 times 2021's earnings. Maintaining a neutral rating and considering that gradual deregulation of travel controls may boost market expectations, we maintain our target price of HK $1.07, corresponding to 17.0 times 2021 price-to-earnings ratio, which is 11% lower than the current share price.
Risk.
The negative impact of the epidemic on the tourism industry exceeded expectations.