Hotel Shilla: outbound recovery is also positive for online duty-free sales
The upturn in overseas travel is also positive for online duty-free sales
Travelers abroad usually visit downtown duty free shops or their online stores. Most Koreans traveling abroad tend to shop tax-free online, which generates operating margins 10-50% higher than offline sales. When travel abroad picks up, the increase in the share of duty-free sales to domestic travelers abroad from 5 to 10% currently should therefore help accelerate the improvement in the operating profit of shops outside downtown taxes.
Consolidated operational forecasts for 2Q21 revised to KRW 31.7 billion (YoY TB)
According to data from the Korea Association of Duty Free Shops, the growth of duty free sales in the downtown area of the Republic of Korea has continued every month this year. Downtown duty free sales improved by 20% MoM in February and likely increased by 20-25% MoM in April. This year’s April sales even exceeded the April 2019 results (the previous record for April), thanks to record sales to small Chinese traders. Sales in May and June tend to decrease compared to April due to low seasonality. However, sales to foreigners (mainly small Chinese traders) in 2Q21 (April-June) are expected to increase at a faster pace than expected, reaching 19.8% QoQ.
We are revising our consolidated operating profit forecast for Hotel Shilla from KRW 25.5 billion (similar to consensus estimates) to KRW 31.7 billion for 2Q21. Profits could even exceed our higher expectations given the lack of competition in the market and the strong sales reported to date. Annual operating profit is forecast at 142.3 billion KRW (positive swing over one year) for 2021 and 242.5 billion KRW (+ 70.4% over one year) for 2022.
Keep BUY and increase target price to 120,000 KRW
The profit forecast has been revised up for 2021 but remains unchanged for 2022. The enterprise value of the Shilla Hotel is estimated at KRW4.68tr based on 2022F EBITDA. Our multiple target of 17x applied in the assessment of the company’s duty-free activities reflects a 25% reduction from the EV / EBITDA average of the past six years, recorded during the period of rapid growth of Chinese travelers. On their own, small Chinese traders have driven monthly sales to foreigners to an all-time high. The resumption of sales to domestic travelers abroad as well as to foreigners in general is likely to lead to a strong improvement in long-term profits. At the current level of the stock price, we recommend that the shares of Hotel Shilla be gradually accumulated.