20171117-中国银河国际证券-香港中旅-00308.HK-New_Management_Ready_to_Uncover_Hidden_Value_7页_702kb

China Travel International (0308.HK) Summary: New Management and Value Unlocking Strategy

Core Content

China Travel International (CTI) is currently undergoing a strategic transformation under its new management team, aiming to unlock hidden value in its asset portfolio and improve long-term profitability. The company has a strong historical presence in the Hong Kong market, with a 25-year listing history, and holds a significant number of properties that are undervalued due to being recorded at historical cost rather than market value.

Main Points

1. Strategic Direction and Management Changes

• CTI has introduced a new management team since 2016, with Mr. ZHANG Fengchun as the new chairman and several new executive directors.
• The new management aims to enhance profitability and shareholder returns by focusing on two key areas:
  • Unlocking non-core assets through disposal.
  • Reallocating resources to the tourism business to generate recurring earnings.

2. Asset Disposal Strategy

• CTI plans to sell non-core assets, including:
  • A commercial property in Mongkok with an estimated value of HK$1bn, expected to be sold in Q1 2018.
  • Relocating offices in Central and disposing of some of them.
  • Revamping a warehouse in Hung Hom into service apartments.
• These disposals are expected to generate a one-off gain of up to HK$900m in the short term, contributing to improved financial results.

3. Hotel Portfolio Valuation

• CTI's hotel properties are recorded under Property, Plant & Equipment (PP&E), not as investment properties, and thus are not reflected at market value.
• The net book value (NBV) of the hotel portfolio at the end of 2016 was HK$3,139m, but its estimated market value could be as high as HK$9,655m, implying a ~40% upside.
• A 40% discount is applied to the market valuation to arrive at a more conservative estimate of HK$5,793m.

4. Zhuhai OSR Project

• CTI is co-developing a property project in Zhuhai with Evergrande, which is expected to be delivered by the end of 2018.
• The project is expected to contribute a one-off gain of HK$200-300m in 2018E under "Associates."

5. Financial Performance (1H2017)

• Revenue increased by 29% YoY to HK$2,352m.
• Diluted EPS rose by 40.2% YoY to 6.87 HK cents.
• The core tourism business benefited from a favorable market environment, particularly in Hong Kong and the Mainland, with resilient visitor numbers and spending.

6. Valuation and Shareholder Returns

• CTI is currently trading at a PBR of 0.95x, which is considered undemanding.
• Adjusted book value (NBV), considering asset revaluation and potential gains, is estimated at HK$3.41/share, implying a 29.3% upside.
• The company has a strong balance sheet with HK$4.53bn in net cash, providing flexibility for share buybacks and special dividends.
• The company has already distributed special dividends since 2014 and may do so again after asset disposals.

7. Long-Term Strategy

• CTI aims to enhance asset value and improve incentives for management to focus on the tourism business.
• The company is exploring PPP (Public-Private Partnership) opportunities in various provinces, leveraging its parent company's background.
• With a stronger tourism business, the company expects to generate stable returns in the medium term.

8. Financial Metrics

• The company has healthy liquidity, with HK$4.53bn in net cash as of 1H2017.
• Free cash flow in 1H2017 was HK$691m, indicating good cash generation.
• The company has a strong debt-to-equity ratio, with net cash being a significant component of its balance sheet.

Key Information

• Market Cap: US$1,842m
• Free Float: 39.8%
• Current Share Price: HK$2.64
• Estimated Adjusted NBV: HK$3.41/share (up 29.3% from current price)
• Expected 2018E EPS: HK$0.13
• Expected 2018E Net Profit: HK$723m
• Expected 2018E EBIT: HK$815m
• Potential One-Off Gains:
  • Mongkok Property: HK$747m after tax
  • Zhuhai OSR Phase 1: HK$200-300m

Conclusion

CTI is in the process of unlocking value through asset disposal and focusing on its core tourism business. With a healthy balance sheet, positive financial performance in the first half of 2017, and a strategic shift under new management, the company is positioned to improve its long-term profitability and shareholder returns. The potential revaluation of its assets, especially the hotel portfolio and Mongkok property, could lead to a significant increase in value, supporting a re-rating of the stock in the future.