[Click eStock] Hotel Shilla Falls Short of 4Q Expectations... Overseas Travel Resumption Is Key

Operating loss of 35.2 billion KRW... Falls short of expectations by 3.2 billion KRW
Hotel demand recovering with vaccine rollout... Attention needed on resumption of overseas travel

[Asia Economy Reporter Minwoo Lee] Hotel Shilla posted disappointing results in the fourth quarter of last year, falling short of market expectations. While reducing cost burdens through inventory asset optimization, analysis suggests that the timing of overseas travel resumption will determine the stock price rebound.

On the 1st, Kiwoom Securities maintained a 'Buy' rating and a target price of 100,000 KRW for Hotel Shilla. Although overall fixed costs are decreasing and performance is improving due to recovery in duty-free and hotel demand, the recovery of fundamentals tied to the resumption of overseas travel is seen as crucial.

In the fourth quarter of last year, consolidated sales reached 841.9 billion KRW, with an operating loss of 35.2 billion KRW. Sales decreased by 45.5% year-on-year, and operating profit turned negative. These results were significantly below the market consensus of 942.1 billion KRW in sales and an operating loss of 3.2 billion KRW. The main causes were identified as ▲ increased commission rates for normalizing duty-free inventory ▲ poor hotel and leisure sales due to the third wave of COVID-19 ▲ changes in lease accounting assumptions (8 to 9 billion KRW) ▲ one-time reflection of retirement benefits. The controlling shareholder net loss in Q4 also reached 113.6 billion KRW, far below the consensus of 9.3 billion KRW. This was due to approximately 100 billion KRW in impairment losses on lease rights (related to Incheon Airport Terminal 2 duty-free store) recorded in non-operating income and expenses, in addition to poor operating profit.

Additionally, in-city store commission fees and commission rates recorded 143.3 billion KRW and 20.9%, respectively. This was an increase of 37.3 billion KRW (3.8 percentage points) compared to the previous quarter. Considering that Q4 in-city store sales increased by 4.3% (28 billion KRW) compared to Q3 and consolidated current assets decreased by 176.7 billion KRW from Q3, it is evaluated that overall inventory asset efficiency was strongly executed through intensified promotional activities.

In the first quarter of this year, as duty-free demand recovers, the efficiency of commission rates and the effect of reduced amortization of lease rights assets are expected to significantly improve operating profit and loss compared to Q4 last year. Recently, daily new COVID-19 cases in Korea have also decreased, raising expectations for a rebound in hotel occupancy rates.

For a mid- to long-term rebound, the recovery of overseas travel demand is necessary. Kiwoom Securities researcher Sangjun Park explained, "Vaccinations against COVID-19 have begun mainly in developed countries, and Korea plans to start vaccinations from late this month," adding, "The timing of overseas travel resumption after vaccination will play an important role in the timing and strength of the stock price rebound."

While performance improvement is progressing due to fixed cost reduction and recovery in duty-free/hotel demand,

mid- to long-term expectations for fundamental recovery depend on the resumption of overseas travel.