CHINA TRAVEL HK separates real estate to lighten the load and move forward

Hong Kong Travel suddenly announces a major restructuring plan, separating tourism real estate from the listed company and significantly reducing its capital Key Points: Shareholders can choose to receive cash of HKD 0.336 per share Future focus will be on developing tourist attractions and related businesses Liu Zhiheng In the booming real estate market years ago, China Travel International Investment Hong Kong Limited (0308.HK) had high hopes for its tourism real estate, believing it to be a major growth driver; however, real estate has become a burden for the group since the real estate bubble burst a few years ago. To shed this heavy load, the company suddenly announced a major restructuring plan. The plan is for Hong Kong Travel to separate its tourism real estate projects from the listed company, to be held by a private company instead, and to distribute shares of the private company to shareholders through a physical distribution. If shareholders do not wish to receive shares, they can choose to receive cash of HKD 0.336 per share. Based on the closing price of HKD 1.53 per share on the trading day before the announcement, this represents nearly 22% of the share price. According to the announcement, the private company's net asset value for tourism real estate is HKD 4.906 billion. If calculated based on Hong Kong Travel's current total shares of 5.537 billion, the net asset value per share is HKD 0.886. At the same time, Hong Kong Travel proposes to reduce its capital from HKD 9.22 billion to HKD 720 million, a significant reduction of HKD 8.5 billion. The proceeds from the reduction will be allocated to the company's retained earnings. Real Estate Dragging Down Performance Tourism real estate refers to real estate development on land near tourism projects such as theme parks or scenic areas. Hong Kong Travel has five projects under its umbrella, located in Zhuhai's Huaqing Bay resort hotel and residential area, the Huaqing Bay resort hotel and hot springs in Xianyang, a resort hotel and residential area in Anji, Zhejiang, a commercial complex in Shenzhen, and the Jintang project in Chengdu, Sichuan. According to Hong Kong Travel, the performance of tourism real estate has been poor in recent years, with revenues of HKD 629 million and HKD 459 million for 2023 and 2024, respectively, but recording losses of HKD 461 million and HKD 239 million. The situation continued to deteriorate in the first half of this year, with revenues of only HKD 147 million and losses reaching HKD 192 million. The company has also had to continuously impair its investment properties, with fair value losses of HKD 90.72 million, HKD 19.13 million, and HKD 222 million from 2022 to 2024. The impairment loss for the first half of this year reached HKD 123 million, a year-on-year increase of 24%. Due to the impact of property development, profits have been dragged down, with annual profits falling 56% to HKD 106 million last year, and a loss of HKD 86.85 million in the first half of this year, compared to a profit of HKD 63.23 million in the same period last year. Focusing on Tourism is More Beneficial than Harmful This restructuring is an ideal deployment for Hong Kong Travel. With the mainland real estate market still sluggish and showing no signs of recovery, selling projects is not easy; however, property development requires significant investment, impacting the group's cash flow. By removing it from the listed company, it can reduce the drag from property performance and at least avoid continuous impairment of properties In addition, China Travel Hong Kong does not need to invest funds in real estate development and maintenance, allowing it to concentrate resources on tourism business and focus on the company's main operations. Especially in light of the ideal performance of domestic tourism in recent years, it can seize the opportunity to expand aggressively, which is better than investing funds in the continuously bottom-seeking real estate industry. In fact, a month and a half before the disclosure of the restructuring plan, China Travel had already acquired from Vanke the ski resort, hotel, apartments, and commercial street of Songhua Lake Ski Resort in Jilin Province, and also purchased the ski resort management company, involving funds of 300 million RMB, in addition to bearing the project's bank loans of 755 million RMB. It is clear that China Travel Hong Kong is investing resources in the tourism business, further expanding its strategy in urban and leisure projects, with a focus on the skiing industry. Market Positioning is Clearer Currently, with the real estate development being sluggish, project development is prone to losses, whereas the profit margins of tourism attractions are much higher than those of real estate. If real estate is divested, investors will find it easier to value the company's prospects, and without the burden of real estate business, it will be more favorable for the company's valuation. In the past two years, tourism-related listed companies have become a major focus in the investment market, with Ctrip Group (9961.HK) and Tongcheng Travel (0780.HK) seeing quite active trading and being favored by investors. Although China Travel Hong Kong is smaller in scale compared to the two, after divesting real estate, a pure tourism company undoubtedly makes it easier for investors to understand the company's positioning, making it more attractive to investors in the current favorable tourism environment. The day after China Travel Hong Kong announced its restructuring business, the Hang Seng Index fell by over 400 points, but the company's stock price rose instead, even surging nearly 15%. Although it closed slightly lower at HKD 1.66, it still rose 8.5% for the day, reflecting the market's positive view on the company's restructuring direction