Hotel Shilla, Some Relief for Now but Annual Deficit Inevitable This Year

Recovery Trend Since April Lows... Extension of Incheon Airport Duty-Free Discount Also Effective
Concerns Over Exclusion from Global Duty-Free Industry... Risks Increase as COVID-19 Prolongs

[Asia Economy Reporter Minwoo Lee] Hotel Shilla is entering a recovery phase after going through the worst period due to the impact of the novel coronavirus infection (COVID-19). However, since COVID-19 has not been completely resolved, an annual deficit this year is considered inevitable.

On the 26th, Shin Young Securities forecast that Hotel Shilla will record sales of 807.6 billion KRW and an operating loss of 51.7 billion KRW in the second quarter of this year. Compared to the same period last year, sales decreased by 35.7%, and operating profit turned into a loss. Specifically, sales in the duty-free and hotel leisure sectors are estimated to decline by 38% and 12%, respectively, compared to the same period last year. Operating losses are expected to reach 41.7 billion KRW and 10 billion KRW, respectively.

The impact of COVID-19 is understood to have entered a somewhat recovery phase. Duty-free sales showed some recovery in May and June after hitting the lowest point in April. Jungyeon Seo, a researcher at Shin Young Securities, said, "Demand from Chinese 'Daigong (代工, Chinese peddlers)' at downtown duty-free shops is maintained at a certain level, and additional sales channels have opened through third-party re-exports. However, it appears that domestic customs clearance and third-party re-exports did not consume as much inventory as initially planned, which will continue into the third quarter and help secure liquidity rather than improve performance."

The 50% reduction in airport duty-free shop rent by Incheon International Airport Corporation was also effective. It is estimated that this resulted in a rent reduction effect of about 55 billion KRW from March to June. Although the hotel industry continues to be hit by COVID-19, leisure demand from domestic tourists has replaced business demand, and in some regions such as Jeju, occupancy rates have recovered to around 80%.

Although long-term risk factors remain, the outlook is for gradual recovery in the mid to short term. It is analyzed that duty-free business will not recover quickly in the second half of the year unless tourist self-quarantine and inter-country travel restrictions are lifted. Also, since downtown duty-free shops rely on Daigong demand, margin improvement is difficult. At least, from September for six months, a temporary sales-linked rent system will be applied to duty-free shops at Incheon Airport, so the possibility of second-half performance being worse than the first half seems low.

Researcher Seo said, "There is uncertainty about the situation if the COVID-19 situation does not improve after the temporary benefits and if the rent negotiations for the airport's 4th phase project are not concluded favorably, but concerns about this are excessive. Rather, the most burdensome factor is the possibility that global companies and Chinese distribution platforms devise and solidify a method to exclude Korean duty-free shops and trade directly, which is a risk that could become more prominent the longer COVID-19 prolongs."

This content was produced with the assistance of AI translation services.