Shilla travel retail profits fall sharply in Q2 but company beats market expectations

SOUTH KOREA. Hotel Shilla’s travel retail division posted a decline of -8% in Q2 sales year-on-year to KW790 billion (US$708 million), while operating profit in the division fell by -47% to KW8.2 billion (US$7.3 million). Within Korea only, duty free sales hit KW658.9 billion (US$590 million), down by -10.5%.

The business has been hit by the collapse in Chinese tourism since mid-March due to the THAAD dispute with China, as well as soaring tour group agency commission rates, although these eased in comparison to Q1 (see table) and were welcomed by the market (see below).

Consolidated downtown duty free sales hit KW481.9 billion (US$432 million) in the quarter, while airport sales were KW308.1 billion (US$276 million).

Shilla’s consolidated duty free sales (both in and outside Korea) and its operating profit (right) fell in Q2, but the markets welcomed a “better than consensus” performance

Shilla however presented a more upbeat note about its prospects for Q3. In its earnings release the company said it would benefit from its increased competency as a global travel retailer “through continuous expansion in foreign markets” and from the “stabilisation of current operations”.

Duty free commission rates eased in the latest quarter, a positive sign in the highly competitive Korean market

Leading analyst Mirae Asset Daewoo backed that assessment and said: “Despite the collapse in package tours, domestic duty-free revenue held up remarkably well at KW658.9 billion. We believe this was largely due to strong inflows of resellers attracted by the domestic duty-free channel’s superior merchandising quality and competitive prices amid strong underlying demand. While Chinese resellers have typically posed a burden on profits via travel agent commissions and bulk purchase discounts, we believe successful overhauls in the commission structure helped boost OP margin to 2.8% (+0.2%p quarter on quarter) and hence served as the primary driver behind the quarter’s earnings surprise.”

“Even in the absence of regular Chinese tourists, the company was able to lower commissions because of its unique merchandising capabilities,” noted Mirae Asset Daewoo

The analyst added: “The downtown duty-free unit’s better-than-consensus revenue in 2Q17 suggests the company is doing a good job of defending its market share against new entrants. We also believe that even in the absence of regular Chinese tourists, the company was able to lower commissions because of its unique merchandising capabilities. Compared with retail consumers, large resellers are more sensitive to merchandising and inventory availability. We believe there are only a handful of major domestic duty-free operators that have the buying power to stock popular products in scale.”

Based on a better than expected performance from duty free as well as from the hotels & leisure division, Mirae Asset Daewoo maintained a ‘Buy’ rating on Hotel Shilla shares and raised its target price by +13.3% to W85,000 (from W75,000).

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