[Click eStock] "Hotel Shilla, 2Q Earnings Improvement Expected... Target Price Up"

by Kwon Jaehee

Published 10 Apr.2023 08:08(KST)

On the 10th, KB Securities maintained its 'Buy' rating on Hotel Shilla and raised the target price by 5% from the previous level to 100,000 KRW.

In the first quarter of this year, Hotel Shilla reported consolidated sales of 978.2 billion KRW and operating profit of 14.4 billion KRW, which are expected to fall short of consensus estimates by 13% and 23%, respectively. In particular, downtown duty-free store sales are estimated to have declined by 30%, due to the strategy implemented since January 2023 to reduce discount benefits for _bottari_sang_ (informal traders). Despite the sharp drop in sales, the downtown duty-free stores' operating profit is estimated to be around 6.3 billion KRW, positively influenced by the patent fee refund (estimated at about 10 billion KRW) and improvements in gross profit margin. Domestic and international airport duty-free stores are expected to see a significant increase in sales due to the reopening effect. The hotel and leisure segment is anticipated to achieve 19% sales growth and 43% increase in operating profit, supported by recovery in occupancy rates.

[Image source=Yonhap News]

Accordingly, Hotel Shilla's sales for 2023 are projected to reach 4.9635 trillion KRW, and operating profit is expected to increase by 77% year-on-year to 139 billion KRW. The increase in operating profit is presumed to stem from improved profitability in downtown duty-free stores. Both sales and operating profit margin of downtown duty-free stores are expected to improve quarter-on-quarter from the first quarter, which is considered the bottom. Following changes in pricing policy, resistance from _bottari_sang_ is expected to ease, as discount competition in the Chinese cosmetics market will soften due to the recovery of Chinese consumption, travel expenses for visits to Korea normalize, and restocking demand from _bottari_sang_ is anticipated to resume from April.

Shinae Park, a researcher at KB Securities, analyzed, “Although short-term performance is expected to deteriorate due to the pricing policy changes at the beginning of the year, this is an indispensable decision for the medium- to long-term profitability recovery of downtown duty-free stores,” adding, “Expectations remain valid that sales from both _bottari_sang_ and tourists will improve from the second quarter onward.”