Lijiang:Losing ground -d/g to Hold

Slight miss to 2016earnings; we worry about the long term

    The company reported 2016results with 10% yoy growth in core earnings(RMB219m vs RMB199m in 2015), which missed our estimate of RMB227m bya slight 4%. We believe the key problem for Lijiang Tourism is the PerformanceShow business, which has had intense competition from Songcheng (Buy; lastprice - CNY 22.07) in the past two years. In 2017, we expect regulation of lowcostgroup tours to impact traffic in Lijiang, which in turn would impact theCable Car business. With the tough outlook, the stock is trading at 28x our2017earnings estimate, which we believe is fair. We thus downgrade LijiangTourism to Hold, with a new price target of RMB 16.7(previously RMB18).

    Govt action on low-priced group tours likely to impact traffic in Lijiang, Yunnan

    Tourism traffic in the city of Lijiang, Yunnan province is key to the earningsgrowth of the company. Its Jade Dragon cable car (beside the YulongMountain) is the core earnings driver for the company. Traffic for the JadeDragon cable car increased 18% yoy to 2.68m in 2016from 2.26m in 2015. Webelieve this was largely due to an increase in low-priced group tours in 2016.However, the Chinese government took action on low-priced group tours at the2016year-end, stating that their prices were unreasonable. We believe trafficgrowth will drop significantly in 2017E. We cut our cable car traffic to mildergrowth of only 8% yoy in 2017E.

    Unlikely for Performance Show to turn around in the long term

    We believe the company’s performance show business will continue to losemarket share to Songcheng and will see a profit decline in 2017E. We lower ournet profit by 12.7% in 2017E to reflect 1) a performance show profit decline and2) regulations restricting low-cost group tours in Yunnan. Revenue fromperformance shows declined 25% yoy in 2016, due to intensified competitionfrom Songcheng’s Romantic Show of Lijiang (which reported a 30% yoy increasein revenue in 2016). The number of visitors decreased 24% yoy to 1.54m in 2016.

    Valuation and risks

    We derive our new target price of RMB16.7on a DCF-based valuation (8.6%WACC and 3% terminal growth rate). The stock currently trades at 27.5x P/E,which we believe is fair relative to peers. Key risks include extreme weatherconditions and natural disasters in Yunnan, intensified competition fromSongcheng, and cable car capacity and safety incidents.