[Click eStock] "Hotel Shilla, It Could Hardly Get Worse... Target Price Down"

Target Price Downgraded from 90,000 Won to 80,000 Won

Korea Investment & Securities lowered the target price for Hotel Shilla from 90,000 KRW to 80,000 KRW on the 2nd, viewing that the duty-free business is unlikely to worsen further from the current situation. The investment rating was maintained as 'Buy.'

Myungjoo Kim, a researcher at Korea Investment & Securities, stated, "Although the first-quarter earnings fell short of market expectations, since expectations for the results were very low, the stock price decline is expected to be short-term," adding, "There is still optimism about the recovery of Chinese group tourists in the duty-free business, and Hotel Shilla's duty-free business is unlikely to deteriorate further. Considering these points, Hotel Shilla is a defensive stock with upside risk within the retail sector."

Hotel Shilla's first-quarter earnings this year recorded sales of 980.8 billion KRW, a 30.4% increase compared to the same period last year, and operating profit of 12.1 billion KRW, a 64.9% decrease. The operating profit was 58.4% below market expectations. Researcher Kim analyzed, "The hotel segment saw a 5% increase in sales compared to the same period last year, but operating profit decreased by 33% to 6.2 billion KRW. It is estimated that profitability declined as staycation (hotel vacation) demand with a high average spending per customer decreased, while occupancy rates increased among customers with lower average spending," and added, "The duty-free segment's operating profit fell 77% to 5.9 billion KRW, and the patent fee refund (about 2 billion KRW) is expected to be reflected in the second quarter."

The domestic duty-free business slump led to an overall earnings decline. Researcher Kim said, "In the duty-free segment, the profitability of the domestic duty-free business significantly underperformed market expectations, acting as a factor in the company's overall earnings decline," and explained, "The reason for the poor profitability is that the discount rate within the duty-free industry did not decrease as much as the market expected, and the recovery of Chinese group tours has been slow." He added, "On the positive side, it appears that there were no losses from handling large-scale aged inventory (products nearing expiration, etc.) that caused operating losses in Hotel Shilla's duty-free segment in the second half of last year, and the overseas duty-free operations (Singapore, Hong Kong, Macau) improved compared to the previous quarter, recording an operating loss of about 10 billion KRW, which is also positive."