Guotai Junan International: CHINA TRAVEL HK(03808) future performance is expected to continue to improve. Recommended to pay attention to the development of follow-up business.

Guo Zheng Guo Jie released a research report stating that CHINA TRAVEL HK (03808) saw a slight decline in performance in the first half of the year, mainly due to a significant negative impact from the tourism scenic area business. After divesting from the continuously loss-making tourism real estate business, it is expected that the financial statements will improve. Looking at other businesses, the hotel business continues to grow, and because fixed costs of hotels make up a large proportion, an increase in revenue will result in a decrease in expense ratio, leading to profit growth faster than revenue growth; the passenger transport business is relatively stable, and the tourism document business will also return to normal levels. It is believed that under the drive of consumption recovery and tourism warming up, the overall performance will also improve in the second half of the year to some extent. In addition, the peak season for ice and snow is approaching, and the consolidation of the ice and snow business in November will also bring more incremental performance to the company. 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 it is recommended to pay attention to the development of future business. Guo Zheng Guo Jie's main points are as follows: Event On October 12th, CHINA TRAVEL HK announced that the company plans to implement a proposed distribution to shareholders, divesting the tourism real estate business to a private company through group restructuring. At the same time, the board of directors proposes to implement a reduction of share capital, reducing the share capital account funds from HKD 9.22 billion to HKD 0.72 billion. After divesting the continuously loss-making tourism real estate business, the company will focus on core businesses, and it is expected that the financial statements will also improve. In addition, the company actively laid out the ice and snow economy, and previously announced the acquisition of 75% equity interest in Jilin Songhua Lake International Resort Development Co., Ltd. and Beijing Wan Ice and Snow Sports Co., Ltd. under Vanke, and related businesses will be consolidated in November, which is expected to bring more revenue and profit increment to the company. Divestment of tourism real estate business, focus on core business To improve core competitiveness and overall profitability, the company announced a group restructuring to reorganize the equity of the tourism real estate business to be held by a private company, and the divested part includes 5 projects: Zhuhai Haiquan Bay, Xianyang Haiquan Bay, Anji Resort, Shenzhen Dakuang Airport Project, and Chengdu Jintang Project. The divested part is expected to have revenues of HKD 629 million, HKD 459 million, and HKD 147 million respectively in 2023/2024/2025H1, with net losses of HKD 461 million, HKD 239 million, and HKD 192 million. Due to the continuous loss of the tourism real estate business, and the uncertain future profitability, divesting will reduce the drag on profits. The company expects that the proposed distribution will result in a loss of HKD 160 million, mainly due to the reclassification of accumulated exchange differences related to the tourism real estate business. After the distribution is completed, the company will retain and focus on the existing other businesses, including: 1) tourism scenic areas and related businesses, including theme parks (Shenzhen Window of the World and Shenzhen Splendid China), natural and cultural tourist destinations (Shapotou Scenic Area, Detian Waterfall, Luzhou Laojiao cultural tourism, Lugu Lake, etc.), and tourist destination supporting services; 2) tourist document and related business; 3) hotel business, including six hotels in Hong Kong and Macau and a serviced apartment, Beijing V-Continent Hotel, and CHINA TRAVEL HK V-Continent International Hotel Management Co., Ltd.; 4) passenger transport business, mainly including cross-border buses and ferry services in the Greater Bay Area. Shareholders may choose to distribute dividends The distribution this time provides shareholders with two distribution options, 1) physical distribution: based on each share corresponding to one share of a private company; 2) cash distribution: paying HKD 0.336 in cash per share, approximately 21.96% of the closing price of HKD 1.53 per share on the last trading day before the announcement. Shareholders of Shanghai (Shenzhen) - Hong Kong Stock Connect may have difficulties in receiving shares of private companies, so they will directly receive cash distributions. After the distribution is completed, the tourism real estate business will be delisted from the listed company and become a private company directly controlled by the group. Proposed reduction of share capital, creating funds transferred to retained earnings In addition, the board of directors proposes to reduce the funds in the share capital account from HKD 92.22 billion at the time of the announcement to HKD 7.22 billion, and the HKD 8.5 billion generated by the proposed reduction in share capital will be transferred to the company's retained earnings, which will be used as reserves available for distribution. After the proposed distribution, the company's retained earnings will be significantly reduced, severely limiting the company's ability to legally pay dividends and/or take any actions requiring the use of available distributions reserves. Once the reduction of share capital takes effect, the company will be able to more flexibly make decisions on corporate actions and/or dividend policies. Actively layout the ice and snow economy, acquire ice and snow projects On August 26th, the company entered into a stock transfer agreement with Changchun Vanke Real Estate Development Co., Ltd. and related parties to acquire a 75% equity interest in Jilin Songhua Lake International Resort Development Co., Ltd. held by Changchun Vanke, and entered into a stock transfer agreement with Wanke Hotel Management Co., Ltd. and related parties to acquire a 75% equity interest in Beijing Wan Ice and Snow Sports Co., Ltd. Ice and snow company's core business is snow field development planning, construction consulting, operation management, marketing promotion, and ski teaching, managing a total of 9 well-known snow fields and having abundant mountain teaching cooperation resources, possessing strong ski industry integration capabilities. It is expected that the above projects will be consolidated in November of this year, bringing incremental performance. The company stated that it will actively respond to the national call to develop the ice and snow economy, and will further develop future related projects. Risk warning: macroeconomic downturn, weak consumer and tourism market; intensified industry competition; ice and snow business growth below expectations.