Hotel Shilla Starts Recovery... Still a Long Way to Go

3Q Sales of 879.5 Billion KRW and Operating Loss of 19.8 Billion KRW Recorded
Sales Increased Compared to Previous Quarter and Operating Loss Reduced to One-Third
Expectations for Performance Recovery Rise... Travel Demand Recovery Remains Key

[Asia Economy Reporter Minwoo Lee] Hotel Shilla's performance has entered a recovery phase. Although it still recorded an operating loss, the deficit was significantly reduced compared to the previous quarter. It is evaluated that the demand from Chinese "ttaigong" (daigou) boosted duty-free sales. However, concerns about the resurgence of COVID-19 remain, and travel demand is still sluggish, indicating considerable uncertainty.

According to the Financial Supervisory Service's electronic disclosure system on the 2nd, Hotel Shilla recorded consolidated sales of 879.5 billion KRW and an operating loss of 19.8 billion KRW in the third quarter of this year. Sales decreased by 40% compared to the same period last year, and operating profit turned into a loss. Although the performance has been extremely poor since COVID-19, it is considered to have entered a recovery phase. Sales increased by 68.2% compared to the previous quarter, and the operating loss was reduced to about one-third of the previous quarter's 63.4 billion KRW. These results significantly exceeded market consensus forecasts of 782.1 billion KRW in sales and 31.3 billion KRW in operating loss.

By business segment, the TR division, including the duty-free business, recorded sales of 771 billion KRW and an operating loss of 14.2 billion KRW. Sales increased by approximately 75.5% compared to the previous quarter, and the operating deficit decreased by about 70%. Among these, the downtown stores recorded sales of 657.8 billion KRW and are estimated to have achieved an operating profit of around 10 billion KRW. Since the Jeju store suspended operations until the third quarter, downtown store sales can be considered as the combined sales of the Seoul store and online sales. Excluding the Jeju store from last year's downtown sales, it is presumed that sales were practically at the same level as the previous year. This means sales rebounded rapidly despite the ongoing COVID-19 situation.

However, profitability has not yet normalized. Jinhyup Lee, a researcher at Yuanta Securities, explained, "Although sales grew to the previous year's level, it is difficult for profitability to normalize when the sales proportion of 'ttaigong' is absolute," adding, "The commission rate was 16.1%, which is twice as high as last year."

Although Korea-China flights resumed after about seven months, the impact appears minimal so far. Overseas travel remains difficult due to the mandatory two-week quarantine to prevent the spread of COVID-19, and the number of 'ttaigong' visiting domestic downtown duty-free stores is increasing.

Earlier, Chinese state-owned airline Air China announced it would operate direct flights from Incheon to Beijing every Friday starting on the 30th. This is the first direct flight since the suspension on March 23, about seven months ago. During this period, all international flights from Incheon to Beijing had to transit through provincial cities. While the resumption of regular flights raises expectations for normalization of entry and exit between the two countries, the duty-free industry responds that it may not be a significant positive factor. The burden of two weeks of self-quarantine may prevent a significant increase in visitors. This is why the stock price has struggled to rebound even after the flight resumption was announced on the 25th. On the 26th of last month, Hotel Shilla's stock price rose intraday by 4.31% to 79,800 KRW but has steadily declined since. It closed at 74,200 KRW on the 30th of last month. As of 9:50 AM on the day of reporting, it slightly rebounded to 75,000 KRW compared to the previous close.

China's government policy to revitalize downtown duty-free stores is also a negative factor. Since July, the Chinese government has tripled the purchase limit at Hainan duty-free stores and increased the number of purchase items from 38 to 45. The purchase quantity limit has also been removed.

Ultimately, it is analyzed that profitability improvement will be difficult until the COVID-19 situation settles. Jung Hyun Yoo, a researcher at Daishin Securities, said, "Although the outlook for the duty-free industry remains uncertain amid the prolonged pandemic, downtown stores are showing a steep recovery, and the Incheon Airport store's burden has significantly decreased temporarily," adding, "If the pandemic situation calms down next year, the stock price could recover quickly."

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