[Click eStock] "Hotel Shilla Needs Confirmation of Top-Line Recovery... Target Price Raised"

Target Price Raised from 41,000 Won to 54,000 Won

On June 24, Hanwha Investment & Securities raised its target price for Hotel Shilla from 41,000 won to 54,000 won, anticipating improvements in the duty-free business. However, the firm maintained its 'Hold' investment rating, citing the need to confirm a recovery in the company's top-line performance.

Lee Jinhyup, an analyst at Hanwha Investment & Securities, explained, "We are maintaining our investment rating as we believe confirmation of a top-line recovery is necessary, but we are raising our target price to reflect the impact of rent reductions."

The outlook for the duty-free sector is improving as the surrounding environment becomes more favorable. Lee stated, "The previously strong US dollar, which has weighed on duty-free stores, has lost momentum. The relative strength of the Korean won and Chinese yuan points to increased purchasing power for both Korean and Chinese consumers. Inbound tourism is recovering, and in the third quarter of this year, a visa-free policy for Chinese group tourists will be implemented, heightening expectations for an influx of Chinese group visitors. In addition, overseas airports have begun to implement significant rent reductions. While these environmental factors clearly indicate improvements in the duty-free industry’s business conditions and profitability, it is still necessary to confirm whether factors such as the influx of group tourists and a recovery in domestic demand in China can drive a rebound in the duty-free business before considering a buy on Hotel Shilla, whose earnings are heavily dependent on this sector," he analyzed.

Hotel Shilla’s second-quarter results this year are expected to meet market expectations. Lee said, "Second-quarter revenue is projected at 1.053 trillion won, up 5% year-on-year, with operating profit down 34% to 18.2 billion won, in line with the consensus (the average of securities firms’ forecasts) of 17.8 billion won. The duty-free (TR) division is estimated to post revenue of 875.4 billion won and an operating loss of 2.7 billion won. Despite a rebound in revenue centered on downtown stores, the gross profit margin (GPM) is expected to deteriorate due to the decline in the won-dollar exchange rate and higher discount rates compared to the previous quarter. As a result, the operating profit margin (OPM) for downtown stores is estimated to fall from 9% in the first quarter to 4% in the second quarter." He added, "Losses at overseas airports will offset weak profitability in Korea. As rent reductions at overseas airports become more pronounced from the second quarter, losses at overseas airports are expected to decrease by about 12 billion won compared to the previous quarter."