Huangshan:Top pick among tourist site operators;SOE reform &other key catalysts

2016 earnings largely in line thanks to more efficient cost and expense control

    Outlook for 2017E: SOE reform: Huangshan Tourism announced 2016 annual results. Top line of RMB1,669m was flattish yoy, missing our estimate of RMB1,781m by 6%, mainly because 3Q16 had more rainy days (a factor for all tourist site operating companies in our coverage). However, the company reported 11% yoy growth in core earnings (RMB328m vs RMB294m in 2015), largely in line with our estimate of RMB335m. We believe this was mainly due to management’s better control over costs and expenses, which led to margin expansion. We reiterate Buy on Huangshan and maintain our price target of RMB22.4.

    Outlook for 2017E: SOE reform: new incentive should drive earnings

    The new chairman intends to turn Huangshan into a market-driven listco by trying to separate the operation from the Huangshan government. As a result, there is a new remuneration incentive for management in 2017: 20% of the net profit that exceeds the target will be shared by top management as an additional incentive. Management guided that Huangshan will attract at least 3.3-3.4m tourists in 2017E and the company will continue the long-term strategy of “stepping out of the mountain”. We leave our 2017 earnings forecast largely unchanged. DB will provide an update by hosting a group conference call with Huangshan management on 18 April 2017 at 4pm.

    Looking beyond 2017E, we see a few catalysts for the company.

    Catalysts: 1): We expect the new Hangzhou-Huangshan High-Speed Railway (HSR), to be launched in 2018, to drive significant tourist traffic to Huangshan by connecting it to the population of eastern China (Shanghai, Zhejiang and Jiangsu province). 2) East Huangshan Mountain expansion and the potential acquisition of Hong Cun Village would confirm the company’s long-term strategy of “stepping out of the mountain”. We believe its decision to complete developing the East Huangshan Mountain within three years and the acquisition of shares of Hong Cun Village will further open up capacity.

    Valuation and risks

    We derive our target price of RMB22.4 from a DCF-based valuation (9.3% WACC and 3% terminal growth rate). Key downside risks to our call: 1) delays in railway development, and 2) cable car capacity and safety incidents.