[Click eStock] Hotel Shilla, Worse Results Than Expected... "Customers Need to Come First"

Sales Fall Below 1 Trillion Won... Duty-Free Shop Recovery Uncertain for the Time Being

[Asia Economy Reporter Minwoo Lee] Hotel Shilla's first-quarter earnings fell far short of market expectations. Sales dropped below 1 trillion won, and operating profit turned to a loss. Although the stock price rebounded recently due to market recovery and expectations of demand recovery from China, vague bargain hunting is difficult as the recovery of travel demand due to the novel coronavirus infection (COVID-19) remains uncertain.

According to Korea Investment & Securities on the 27th, Hotel Shilla recorded sales of 944 billion won and an operating loss of 66.8 billion won in the first quarter of this year. Compared to the first quarter of last year, sales decreased by 30%, and operating profit of 82 billion won turned into a loss.

Sales in the duty-free sector decreased by 31% year-on-year to 849 billion won. Sales declined across the board: downtown duty-free shops by 23%, airport shops by 43%, and overseas duty-free shops by 42%. The total operating loss was 49 billion won. Na Eunchae, a researcher at Korea Investment & Securities, explained, "Downtown duty-free shops had the smallest sales decline thanks to reseller sales, but overall, the business environment was extremely poor," adding, "It is estimated that the selling and administrative expense ratio increased significantly amid the sharp drop in sales." Demand was mainly formed by large 'bottari-sang (ttaigong)' traders, resulting in a 33.8 billion won decrease in commission payments compared to the previous year, but fixed costs such as rent, depreciation, and labor costs, which account for about 60% of selling and administrative expenses, showed a significant burden.

In addition, sales in the hotel and leisure sector decreased by 20% year-on-year to 95 billion won. Operating losses also increased from 1 billion won to 18 billion won during the same period.

It is expected that performance improvement will be difficult until travel demand, which plummeted due to COVID-19, recovers. In particular, with a sharp decline in Chinese arrivals, the duty-free industry is expected to remain sluggish this year. The number of Chinese arrivals in the first quarter was 600,000, down 55% from the same period last year. Last month, the number was only 16,000. Since all arrivals must undergo a two-week self-quarantine starting this month, the number of arrivals is expected to have decreased further compared to March.

Researcher Na said, "The domestic duty-free industry is centered on resellers rather than travelers, but currently, physical entry is difficult," adding, "With a sharp decline in not only arrivals but also global travel demand, overseas duty-free shops are also expected to perform poorly." She continued, "In the second quarter, domestic hotels and leisure are expected to gradually recover thanks to improvements in the domestic COVID-19 situation, and cost-cutting efforts are expected in domestic duty-free," but added, "However, large-scale losses will continue due to domestic duty-free sluggishness and an expansion of losses in overseas duty-free."

Meanwhile, the stock price has risen about 17% over the past month, supported by recent market recovery and expectations of demand recovery from China. Nevertheless, since it is fully affected by poor performance and an unprecedentedly harsh business environment, the momentum for a rebound in the first half of the year is considered weak. Researcher Na said, "Global travel demand weakness is also prolonged, making vague bargain hunting difficult," but added, "However, considering the structural growth of the Chinese premium market and the company's competitiveness as a top-tier operator, the process of seeking recovery signals will continue."

For these reasons, Korea Investment & Securities maintained its investment opinion of 'Buy' and target stock price of 93,000 won. The closing price on the previous trading day was 76,900 won.