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Haichang Holding (2255 HK) Summary

Core Content

Haichang Holding is a leading developer and operator of marine theme parks in China. The company is well-positioned to benefit from the growth of the Chinese tourism industry, which is expected to grow at a steady pace. With supportive government policies and rising disposable income, the tourism industry is projected to contribute significantly to China's GDP. Haichang currently operates eight theme parks, attracting over 11 million visitors in 2014, and is developing two new large-scale theme parks in Shanghai and Sanya, which are expected to further boost its growth.

Main Points

• Leadership in Marine Theme Parks: Haichang leads the marine theme park market in China with a market share of 15.7% in 2012 and is recognized as a top player in the industry. It has the largest animal collection in China and is a leader in animal care.
• Tourism Growth in China: The tourism industry in China is expected to grow steadily, with a CAGR of 7.7% from 2014 to 2024. Domestic tourism expenditure is increasing rapidly, driven by rising disposable incomes and government support.
• New Projects and Expansion: The Shanghai and Sanya theme parks are expected to be major growth drivers. The total GFA of the company's theme parks is projected to increase from around 400,000 sqm to 1.35m sqm. The Shanghai project is expected to attract 3.5m visitors in the first year.
• Non-Ticket Revenue Potential: Haichang currently derives only 15% of its revenue from non-ticket sources, significantly lower than the 40% average for international peers. The company is actively working to increase this proportion.
• Financial Performance: Haichang's revenue and net profit have grown steadily from 2012 to 2014. The company has improved its net debt-to-shareholders' equity ratio after its Hong Kong listing, which is positive for future growth.
• Valuation and Investment Recommendation: The analyst initiates coverage with a BUY recommendation and a target price of HK$2.25, based on the industry's EV/EBITDA multiple of 10.9x for 2016F. The upside is estimated at 34.7% from the current share price of HK$1.67.
• Growth Drivers: The company's growth is expected to be driven by rising disposable income, government support, and the opening of new theme parks. Seasonality is a challenge, but the implementation of a paid leave policy may help to smooth this.
• Cost Structure: Haichang's cost-to-revenue ratio is stable, with a focus on fixed costs and minimal variable costs. The company is investing in upgrading its parks to improve visitor experience and increase non-ticket revenue.

Key Financials

Investment Highlights

• Attendance Growth: Haichang's attendance in 1Q15 grew by 21.5% yoy to 1.1m. The company expects a total of 1.31m visitors in 2015, up 14.5% yoy, and 1.44m in 2016, up 10% yoy.
• Ticket Price Trends: Ticket prices are expected to increase slightly, from Rmb82 in 2014 to Rmb84 in 2015 and 2016.
• Non-Ticket Revenue: Management aims to increase non-ticket revenue to 16-17% of total park operation revenue by 2016.
• Property Sales: The company's property business is expected to generate Rmb400m annually, contributing to its overall revenue.
• Strategic Partnerships: Haichang is collaborating with well-known brands such as Huiyuan Juice and Tesla. Orix Corporation, a Japanese aquarium operator, is a major shareholder, which may help in enhancing competitiveness and exploring M&A opportunities.

Risks

• Project Delays: The Shanghai and Sanya projects may not be completed on schedule.
• Regulatory Approvals: The Sanya project may face challenges in obtaining formal approval.
• Competition: Haichang may lose market share to international theme parks, especially with the opening of Shanghai Disneyland in 2016.

Valuation

Conclusion

Haichang Holding is a strong player in China's marine theme park market, with a clear strategy to expand its operations and diversify its revenue streams. The company is well-positioned to benefit from the growth of the tourism industry, supported by favorable government policies and increasing disposable income. The upcoming Shanghai and Sanya projects are expected to significantly boost attendance and revenue, and the company is actively working to increase non-ticket revenue. Despite potential risks, the analyst recommends a BUY with a target price of HK$2.25.