[Click eStock] "Hotel Shilla Overcoming Difficulties... Hotels to Offset Duty-Free Slump"

[Asia Economy Reporter Myunghwan Lee] Korea Investment & Securities announced on the 7th that it maintains a buy rating and a target price of 110,000 KRW for Hotel Shilla. It also analyzed that the weakness in Hotel Shilla's duty-free sector will be offset by the strong performance of its hotel division.

Korea Investment & Securities projected that Hotel Shilla's consolidated sales for the third quarter of this year will increase by 25.4% year-on-year to 1.2144 trillion KRW, and operating profit will grow by 54.1% to 32.1 billion KRW. While sales are in line with market expectations, operating profit is expected to fall short of forecasts by about 11.3%, according to Korea Investment & Securities.

By segment, it forecasted that operating profit in the duty-free sector will be 13.7 billion KRW, similar to 14.8 billion KRW in the previous quarter. This represents a 31.5% decrease compared to the same period last year, due to weakened purchasing power of daigou (Chinese personal shoppers) caused by the depreciation of the yuan, as well as a sluggish Chinese cosmetics market.

On the other hand, operating profit in the hotel division is expected to surge by 1,951% year-on-year to 18.5 billion KRW. Korea Investment & Securities expects the hotel division to continue its strong performance in the third quarter following the second quarter, driven by increased hotel food and beverage (F&B) sales due to reopening of economic activities and the staycation trend.

In the duty-free sector, operating profit is expected to decline by 7.5% compared to the second quarter. Korea Investment & Securities noted that most duty-free companies shifted their strategies to improve profitability in the second quarter, resulting in no intensified competition among duty-free shops in the third quarter. However, the continued depreciation of the yuan against the dollar in the third quarter reduced the purchasing power of daigou, which likely caused a slight increase in the commission rates paid by duty-free shops to daigou.

Korea Investment & Securities analyzed that the slower-than-expected recovery in the duty-free sector will be offset by the core hotel business. This is because the hotel division's structure has significantly improved after experiencing COVID-19. Hotel division costs decreased by 8% year-on-year in 2020 and increased by only 0.9% in 2021. The hotel division's operating profit margin, which was 5.6% in 2019, is expected to rise to 6.2% in 2023 due to structural improvements, according to Korea Investment & Securities.

Researcher Myungjoo Kim of Korea Investment & Securities said, "The tough times in the duty-free industry this year will be sufficiently offset by the strong performance of the hotel division," and added, "We expect a rapid improvement in Hotel Shilla's earnings per share (EPS) next year as the duty-free market recovers."