Caissa Travel:Continued emphasis on outbound retail and penetration-Buy

2016top line up by 34%; bottom line up by 3%.

    Caissa Travel announced its 2016annual report on the evening of 24April. Thecompany’s 2016top line increased by 34% yoy, to RMB6.6bn (missing ourestimate of RMB7.4bn by 10%), but its net profit increased only slightly, by 3%yoy, to RMB213m, from RMB206m in 2015, missing our estimate of RMB241mby 12%. We believe this was due mainly to the slowdown of outbound travelgrowth in 2016. We reiterate our Buy rating for Caissa, with a new target priceof RMB26(from RMB28), revised down owing mainly to a slight cut in our2017retail sales business growth forecast.Top line up 34% yoy, driven mainly by outbound retail business.

    Caissa’s retail sales revenue rose 32%, to RMB3.95bn, in 2016, from RMB3bnin 2015; this was the main driver of total top-line growth, due mainly to the95% yoy growth in retail customers. Revenues for the wholesale business rose11%, to RMB886m, from RMB796m in 2015. At the start of 2017, the companyhad 282offline stores, with 82newly added in 2016. We believe Caissa’smargins will increase in 2017, benefiting from the company’s strong retailbrand and solid market share in the European, Japanese and Korean markets.We cut our 2017earnings forecast slightly, by 5%.

    The main cut is to our 2017Europe line retail sales growth forecast, to 30%,from 35%, as we believe the recent Paris terrorist attack in April will affect the3Q peak season. We also cut our 2017Asia line retail sales growth forecast, to90%, from 100%. As a result, our 2017E net profit decreases by 5%.Valuation and risks.

    Our RMB26target price is DCF-derived (9.6% WACC, 3% TGR, consideringChina's outbound travel has just started). The stock is trading at 31x 2017EPER but at a lower multiple (23x) on 2018E earnings, which we believe isjustified. Key downside risks: 1) lower-than-expected number of outboundtravellers; 2) policy changes; 3) negative events, such as terrorist attacks.