[Into the Stock] Hana Tour, Up 30% in Two Months, Will It Regain Its Splendid Appearance?

[Asia Economy Reporter Minji Lee] As COVID-19 vaccinations expand, the stock price of Hana Tour, the number one travel agency in South Korea's travel industry, is soaring. Over the past two months since April, the stock price has jumped more than 30%. This reflects the expectation that the travel industry will recover. Investors are growing optimistic that the company will regain its former glory before COVID-19, especially after implementing intensive restructuring measures such as workforce reductions since last year.

"Get vaccinated and go abroad"

With vaccinations actively progressing domestically, expectations are rising that people will be able to travel again. If movement restrictions related to vaccinations are eased, suppressed travel demand is expected to explode.

Looking at the United States, where vaccinations are already widespread, the number of air travelers sharply increased during the Memorial Day holiday from April 28 to 31 last month. The U.S. Transportation Security Administration reported that the average daily number of travelers during this period was 1.78 million, the highest level since the COVID-19 outbreak.

In the domestic market, assuming 10% of the total population (5.5 million people) complete their second vaccination, the number of outbound travelers is expected to gradually increase from September. According to Shinhan Financial Investment, the number of outbound travelers is predicted to reach around 180,000 in October. It is expected to increase to 270,000 and 350,000 in November and December, respectively. This contrasts with the mere 380,000 outbound travelers during the 10 months following the COVID-19 outbreak in March last year.

Asset sales and workforce reductions

Although expectations for the travel industry’s recovery are high, Hana Tour’s performance has yet to reflect this. In the first quarter, Hana Tour recorded sales of 7 billion KRW and an operating loss of 41.8 billion KRW. Compared to the first quarter of last year, sales dropped by 92%, and operating losses continued. The operating loss was significantly worse than the market expectation of -25.5 billion KRW. Looking at the financial status, as of the end of the first quarter, the company’s current liabilities stood at 182.8 billion KRW, exceeding current assets of 176.3 billion KRW. Total liabilities were 576.8 billion KRW, and total equity was 82.9 billion KRW, worsening the debt ratio to 695%.

Hana Tour is undergoing intensive restructuring. According to a report submitted last month, the number of subsidiaries decreased from 42 to 33, with 15 companies currently in the process of liquidation.

The company has also taken steps to reduce costs through workforce adjustments. In the first quarter, 17.9 billion KRW was recorded as retirement benefits under other operating expenses, a significant increase from 2.7 billion KRW a year ago, due to severance payments of 15.6 billion KRW related to organizational efficiency improvements. Kihoon Lee, a researcher at Hana Financial Investment, analyzed, “Assuming an average salary of about 40 million KRW and severance pay for six months, this corresponds to about 30-35% of the approximately 2,100 employees. From a cost perspective, this is expected to reduce annual expenses by around 30 billion KRW.”

Recently, the subsidiary Mark Hotel also put up real estate for sale. Hana Tour signed a contract to transfer the building and land of Tmark Hotel Myeongdong, located near Chungmuro in Jung-gu, Seoul, to Aegis Asset Management (Aegis Specialized Private Real Estate Investment Trust No. 412). The transfer amount is 95 billion KRW, accounting for 13% of total assets. The contract deposit of 9.5 billion KRW was received on the 1st, and the balance of 85.5 billion KRW is expected on the 30th. This building was acquired by Hana Tour in 2019 for 88.2 billion KRW. The company stated that the sale was to strengthen financial soundness by securing cash liquidity, but it is analyzed that the profit from the sale was not significant.

The market views that selling the headquarters is necessary to secure sufficient liquidity. Earlier this year, Hana Tour negotiated with SDICORE DMC to sell the lower floors of its headquarters building located in Gongpyeong-dong, Seoul, for 95 billion KRW, but the deal fell through as the other party wanted to acquire the entire building. Sung-ho Park, a researcher at Yuanta Securities, said, “If the company succeeds in selling the Hana Tour headquarters building, it is expected to enter the 2022 market recovery period without additional capital raising risks such as rights offerings or convertible bond issuance.”

Travel recovery expectations fully reflected in stock price... Overbought zone

Looking at the stock prices of domestic travel agencies, all have surpassed pre-COVID-19 levels. Hana Tour’s stock price was 52,800 KRW in early January last year but currently maintains the 90,000 KRW range, a 70% increase. The same applies to its peer Modetour. The stock price, which hovered around 17,000 KRW early last year, now exceeds 30,400 KRW. This contrasts with Carnival, the world’s largest travel company, whose stock price fluctuates around 30 USD, below the 49 USD level recorded early last year.

As expectations for the travel industry’s recovery are quickly reflected in stock prices, the potential for further gains is considered limited. Hana Tour’s stock price has already far exceeded the target prices suggested by Yuanta Securities (88,000 KRW), Kiwoom Securities (73,000 KRW), Hana Financial Investment (89,000 KRW), and Meritz Securities (70,000 KRW).

Some argue that investment should be cautious considering the package travel market’s declining share over the past five years. Despite the increase in travelers since 2018, demand for package tours has decreased, causing stock prices to trend downward. In 2014, 19.3% of outbound travelers used Hana Tour’s package tours, but this fell to 10.8% in 2019.

Hyojin Lee, a researcher at Meritz Securities, explained, “The decline in package tours before COVID-19 is expected to continue after 2022 because there is no reason for travel trends to change at this point. The current stock price level reflects excessive capital inflow.” She added, “Even if package customers increase unexpectedly, the company will have to hire more staff, which will inevitably increase costs again.”