[Click eStock] "Hotel Shilla Confirms Lowest Point... Q2 Reopening Expectations"

[Asia Economy Reporter Myunghwan Lee] IBK Investment & Securities announced on the 2nd that it maintains a buy rating and a target price of 120,000 KRW for Hotel Shilla. This is because reopening (resumption of economic activities) centered on domestic customers is expected in the second quarter, despite operating profits falling short of expectations in the first quarter of this year.

IBK Securities analyzed that Hotel Shilla posted stable sales in the first quarter but recorded lower-than-expected operating profits due to cost burdens. Hotel Shilla's sales in the first quarter of this year were 1.0944 trillion KRW, a 50.5% increase compared to the same period last year, while operating profit was 15.1 billion KRW, down 43.1% from the same period last year. Sales exceeded market expectations by 13%, but operating profit was about 35% lower. Net profit turned to a loss of 7.7 billion KRW.

By segment, duty-free store sales increased by 54.7% year-on-year to 978.5 billion KRW, while operating profit decreased by 69.5% to 12.7 billion KRW. Downtown duty-free store sales rose 60% year-on-year, and airport sales increased by 11%, outperforming the duty-free market growth rate of -1.4% in the first quarter of this year. However, it was noted that the duty-free stores showed a high accounting growth rate compared to product sales due to increased sales centered on Chinese "ttayigong" customers, who pay brokerage fees.

The hotel & leisure segment recorded sales of 115.9 billion KRW, up 22.3% year-on-year, and operating profit of 2.4 billion KRW, turning to a profit and showing a turnaround in sales compared to the previous year. The hotel & leisure segment saw double-digit increases in occupancy rates in Seoul, Jeju, and Shilla Stay, and Jeju Island maintained the previous quarter's level despite entering the off-season, according to the analysis.

It is expected that reopening centered on domestic customers and China's easing of quarantine measures will take place in the second quarter of this year. Hotel Shilla is enhancing its responsiveness by reorganizing online channels to capture domestic traffic and discovering new ttayigong trading partners in line with the increase in domestic reopening demand. There is no additional increase in the brokerage fee rate for ttayigong in the second quarter, and quarantine easing measures in Shanghai are expected after May, raising the possibility of transaction volume recovery.

Ji-young Ahn, a researcher at IBK Securities, said, "The duty-free environment this year remains challenging due to the Chinese government's strengthening of domestic duty-free policies, the slowdown in growth of Chinese cosmetics, and intensified marketing by domestic latecomer duty-free stores," but added, "Hotel Shilla will continue its optimized business model since the outbreak of COVID-19, centered on its main store's competitive advantage in core SKUs and the recovery trend in hotel occupancy rates."