Guozheng International: CHINA TRAVEL HK's future performance is expected to continue improving, recommend paying attention to subsequent business developments

According to the Zhitong Finance APP, Guozheng International released a research report stating that China Travel Service (03808) experienced a decline in performance in the first half of the year, mainly due to significant negative impacts from the tourism scenic area business. After divesting the continuously loss-making tourism real estate business, it is expected that the financial statements will improve. From other business perspectives, the hotel business continues to grow, and due to the high proportion of fixed costs in hotels, revenue increases will lead to a decrease in expense ratios, resulting in profit growth outpacing revenue; the passenger transport business remains relatively stable, and the tourism document business is expected to return to normal levels. It is believed that with the recovery of consumption and the warming of tourism, overall performance will also see some improvement in the second half of the year. In addition, the peak season for ice and snow is approaching, and the consolidation of ice and snow business in November will bring more incremental benefits to the company's performance. With the divestment of the tourism real estate business and the consolidation of the ice and snow business, the company's future performance is expected to continue to improve, and attention is recommended for subsequent business developments. Guozheng International's main viewpoints are as follows: Event On October 12, China Travel Service announced that the company plans to implement a proposed distribution to shareholders, splitting the tourism real estate business into a private company through group restructuring. At the same time, the board of directors proposed to implement a capital reduction, reducing the capital account from HKD 9.22 billion to HKD 720 million. After divesting the continuously loss-making tourism real estate business, the company will focus on its core business, and it is expected that the financial statements will also improve. In addition, the company is actively laying out the ice and snow economy, having previously announced the acquisition of 75% equity in Jilin Songhua Lake International Resort Development Co., Ltd. and Beijing Wanbingxue Sports Co., Ltd., both under Vanke, with related businesses expected to be consolidated in November, bringing more revenue and profit increments to the company. Divesting the tourism real estate business, focusing on core business To improve core competitiveness and overall profitability, the company announced a group restructuring, transferring the equity of the tourism real estate business to a private company. The divested parts include five projects: Zhuhai Haichuan Bay, Xianyang Haichuan Bay, Anji Resort, Shenzhen Airport Project, and Chengdu Jintang Project. The projected revenues for the divested parts in 2023/2024/2025H1 are HKD 629 million, HKD 459 million, and HKD 147 million, with net losses of HKD 461 million, HKD 239 million, and HKD 192 million, respectively. Due to the continuous losses in the tourism real estate business and the uncertainty of future profitability, the divestment will reduce the drag on profits. The company expects the proposed distribution to result in a loss of HKD 160 million, mainly due to the reclassification of cumulative exchange differences related to the tourism real estate business. After the distribution is completed, the company will still retain and focus on its existing other businesses, which include: 1) tourism scenic areas and related businesses, including theme parks (Shenzhen Window of the World and Shenzhen Splendid China), natural and cultural scenic destinations (Shapotou Scenic Area, Detian Waterfall, Luzhou Laojiao Cultural Tourism, and Lugu Lake, etc.), and supporting services for tourism scenic areas; 2) tourism documents and related businesses; 3) hotel business, including six hotels in Hong Kong and Macau and one serviced apartment, Beijing Weijing Hotel, and Hong Kong China Travel Weijing International Hotel Management Co., Ltd.; 4) passenger transport business, mainly including cross-border bus and ferry services in the Greater Bay Area. Shareholder optional distribution plan This distribution provides shareholders with two options: 1) physical distribution: implemented on the basis of one share of the private company for each share held; 2) cash distribution: a cash payment of HKD 0.336 per share, approximately 21.96% of the closing price of HKD 1.53 per share on the last trading day before the announcement date Due to difficulties in receiving shares of private companies, shareholders of the Shanghai (Shenzhen) Hong Kong Stock Connect will receive cash distributions directly. After the distribution is completed, the tourism real estate business will be deconsolidated from the listed company and become a privately held company directly controlled by the group. Proposed capital reduction to generate income transferred to retained earnings In addition, the company's board of directors proposes to reduce the income in the capital account from HKD 9.222 billion at the time of the announcement by HKD 8.5 billion to HKD 722 million. The HKD 8.5 billion income generated from the proposed capital reduction will be transferred to the company's retained earnings, and this amount will be available for distribution reserves. Due to the significant reduction in retained earnings after the proposed distribution, the company will be severely restricted in its ability to legally pay dividends and/or undertake any corporate actions that require the use of distributable reserves. Once the capital reduction takes effect, the company will be able to conduct corporate actions and/or make decisions regarding its dividend policy more flexibly. Actively layout the ice and snow economy, acquire ice and snow projects On August 26, the company entered into a share transfer agreement with Changchun Vanke Real Estate Development Co., Ltd. and related parties to acquire a 75% stake in Jilin Songhua Lake International Resort Development Co., Ltd. held by Changchun Vanke, and entered into a share transfer agreement with Vanke Hotel Management Co., Ltd. and related parties to acquire a 75% stake in Beijing Wanbingxue Sports Co., Ltd. held by Vanke Hotel Management. Songhua Lake Company owns the Songhua Lake Ski Resort in Jilin Province, operating the Songhua Lake Ski Resort, Seibu Prince Hotel, Zhan Yun Salomon Hotel, Qingshan Apartment, and commercial street. Wanbingxue Company focuses on snowfield development planning, construction consulting, operation management, marketing, and ski teaching as its core business, managing a total of 9 well-known ski resorts and possessing rich mountain teaching cooperation resources, with strong integration capabilities in the ski industry. The company expects the above projects to be consolidated in November this year, which is expected to bring performance increments. The company stated that it will actively respond to the national call to develop the ice and snow economy, and further development plans for related projects will be made in the future. Risk Warning: Macroeconomic downturn, weak consumption and tourism market; intensified industry competition; ice and snow business growth below expectations