[Into the Stock] Hotel Shilla, Will Spring Come Despite COVID-19?

Hotel Shilla exterior view

[Asia Economy Reporter Song Hwajeong] Hotel Shilla, which was hit hard by COVID-19 last year, is expected to return to profitability in the first quarter of this year, drawing attention to whether it can recover from the COVID-19 shock. However, it seems more time is needed before a full spring arrives due to the resurgence of COVID-19.

According to the Korea Exchange on the 13th, Hotel Shilla's stock price has risen 3.89% since the beginning of this year. However, compared to mid-January when it touched 90,000 KRW intraday, it has fallen nearly 6%. Hotel Shilla's stock price, which exceeded 100,000 KRW in January last year, dropped sharply due to the direct impact of COVID-19 and fell to the 60,000 KRW range in March. After fluctuating between 60,000 and 70,000 KRW, the stock price recovered to the 80,000 KRW level toward the end of the year and even approached 90,000 KRW again this year. However, as poor performance continued in the fourth quarter of last year, the stock price began to stagnate again.

First Annual Loss Last Year Due to COVID-19 Direct Impact

Hotel Shilla recorded an operating loss of 185.3 billion KRW last year, turning to a deficit. This is the first time in history that Hotel Shilla has recorded an operating loss on an annual basis. Sales amounted to 3.1881 trillion KRW, down 44.2% from the previous year, and net loss was 283.3 billion KRW. Due to COVID-19, Hotel Shilla suffered severe operational damage throughout last year, and its performance inevitably deteriorated. In the first quarter of last year, it recorded an operating loss of 66.8 billion KRW, marking the first quarterly operating loss since it began announcing quarterly results in January 2000. The second quarter also saw an operating loss of 63.4 billion KRW, and although the deficit narrowed to 19.8 billion KRW in the third quarter, the loss phase continued. The fourth quarter also recorded an operating loss of 35.2 billion KRW.

Overcoming last year's poor performance, it is expected to return to profitability in the first quarter of this year. According to financial information provider FnGuide, the consensus forecast for Hotel Shilla's first-quarter results is sales of 842.5 billion KRW and operating profit of 1.2 billion KRW. While sales are expected to decrease by 10.72% compared to the same period last year, operating profit is expected to turn positive. Sung Junwon, a researcher at Shinhan Financial Investment, said, "From March, consolidated operating profit is estimated to turn positive for the first time in about a year," adding, "This is due to improved performance at downtown duty-free shops and reduced losses at Incheon Airport." Sales at downtown duty-free shops in Seoul have been rapidly improving since July 2020, thanks to the boost from 'bottari-sang' (informal traders). Researcher Sung explained, "Sales at the Seoul store grew 30% year-on-year in January, and although January sales decreased 15% compared to December, March is expected to improve by more than 20% compared to February," adding, "Marketing expenses such as promotions and brokerage fees, which were high from November last year to January this year, have significantly decreased in February and March due to eased competition."

Withdrawal from the Incheon Airport Terminal 1 duty-free shop business is expected to greatly improve profitability. Researcher Sung predicted, "Due to excessive airport-related costs, losses have been severe for over five years, but from March, losses are expected to improve to almost negligible levels."

Annual Performance Forecasts Increasing One After Another

Starting with the return to profitability in the first quarter, the performance improvement trend is expected to continue. Securities firms are also raising their performance forecasts one after another. Shinhan Financial Investment raised Hotel Shilla's consolidated operating profit forecast for this year to 66.8 billion KRW, turning positive from the previous year, and to 210 billion KRW for 2022, a 214% increase. Eugene Investment & Securities adjusted this year's operating profit forecast for Hotel Shilla upward to 94 billion KRW, reflecting a faster-than-expected recovery in profitability. NH Investment & Securities expects duty-free sales to grow 15% and hotel sales to grow 13% compared to the previous year.

Lee Ji-young, a researcher at NH Investment & Securities, explained, "Duty-free shops are expected to recover moderately due to the base effect from the peak of COVID-19 fears last year, recovery in Chinese consumption, and vaccination," adding, "Hotels are also expected to grow compared to the previous year due to vaccination and recovery in the domestic economy."

COVID-19 Resurgence Is a Concern

The recent continued spread of COVID-19 is a cause for concern. Daily new COVID-19 cases rose from the 300s at the end of last month to the 600s last week. Although the number dropped to the 500s over the past weekend, signs of resurgence have appeared nationwide, raising concerns about entering a 'fourth wave.' If social distancing is strengthened again due to the resurgence, it could dampen the recovery trend. Moreover, for business normalization, an increase in inbound and outbound travelers is necessary, but if COVID-19 resurges, it will inevitably take more time to normalize.

Park Sangjun, a researcher at Kiwoom Securities, said, "For profitability levels to recover in the mid-to-long term, recovery in overseas travel demand will be necessary," adding, "The timing of resuming overseas travel after vaccination will play an important role in the timing and strength of the stock price rebound."