[Click eStock] Hotel Shilla Faces Inevitable 1Q Loss... Duty-Free Business Darker in 2Q

COVID-19 Leads to Sharp Decline in Activities of Chinese Resellers... Hotels May Recover Due to Domestic Travel Demand

Lee Boo-jin, President of Hotel Shilla (center), is meeting with the press after attending the 45th regular shareholders' meeting held on the morning of the 21st at Hotel Shilla Jangchung headquarters in Jung-gu, Seoul. (Photo by Kang Jin-hyung)

[Asia Economy Reporter Minwoo Lee] Hotel Shilla is expected to post a loss in the first quarter of this year. It is considered to have been directly hit by the impact of the novel coronavirus disease (COVID-19). In particular, the duty-free sector, where visits by Chinese customers have plummeted, is forecasted to face an even gloomier business outlook in the second quarter.

On the 9th, NH Investment & Securities predicted that Hotel Shilla would record sales of 787.8 billion KRW and an operating loss of 28.1 billion KRW in the first quarter of this year. Compared to the first quarter of last year, sales decreased by 41%, and operating profit turned into a loss. The analysis attributes this to the global decline in travel demand due to the spread of COVID-19 and the widespread implementation of social distancing, causing both scale and profitability to fall significantly short of expectations.

Both the hotel and duty-free sectors suffered heavy blows. The duty-free sector is expected to record sales of 726.4 billion KRW, down 41% year-on-year. The operating loss, which turned negative, is also expected to reach 21.9 billion KRW. Ji-young Lee, a researcher at NH Investment & Securities, explained, "Due to the impact of COVID-19, sales at downtown and airport stores are estimated to have decreased by 25% and 63%, respectively, compared to the same period last year." She added, "Especially at airport stores, significant losses are expected due to minimum guaranteed rent conditions imposed by domestic and international airports."

The hotel sector is estimated to have sales of 61.4 billion KRW and an operating loss of 6.1 billion KRW. Sales decreased by 48% year-on-year, and operating profit turned into a loss. Occupancy rates by hotel are estimated at around 10% for the Seoul branch, and 50-60% for the Jeju branch and Stay. The high fixed cost structure of the hotel industry, including labor costs and rent, is considered a burden.

For the duty-free sector, the business outlook is expected to worsen further in the second quarter. Researcher Lee stated, "Due to China's entry ban and suspension of flights, along with South Korea's quarantine policy for incoming travelers, activities of Chinese resellers have become very difficult." She explained, "Although Incheon International Airport Corporation announced a 20% rent reduction policy, the sales decline is as much as 95%, so this will not be sufficient."

The hotel sector, which has a relatively high proportion of domestic customers, is currently seeing a recovery in occupancy rates, and domestic travel demand is expected to increase for the time being, which is anticipated to bring benefits accordingly.

NH Investment & Securities noted that although Hotel Shilla's earnings decline is significant, it maintains a 'Buy' rating in the mid-term. This is based on the uniqueness caused by the disease, the increase in online consumption within China, and expectations for improved Korea-China relations. However, the target stock price was lowered by 16% from the previous 125,000 KRW to 105,000 KRW. The closing price on the previous day was 73,800 KRW.