china consumer tour takeaways hainan: positive outlook ... · premium-oriented sites like atlantis...

Please refer to page 50 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.

28 January 2019 China

EQUITIES

Inside

HK/China consumer valuation table 2

HK/China consumer valuation table (con’t) 3

Introduction to Hainan 4

Pilot Free Trade Zone brings in new opportunities 9

Duty-free policy relaxation continues 11

Building an international tourism and consumption centre 17

China Int'l Travel Service (A-Share) 19

Sun Art Retail Group 30

MacVisit: Songcheng Performance Development 34

MacVisit: Fosun Tourism Group 38

MacVisit: Haichang Ocean Park 42

MacVisit: Regal International Airport 46

Analysts

Macquarie Capital Limited

Linda Huang, CFA +852 3922 4068 [email protected]

Terence Chang +852 3922 3581 [email protected]

Sunny Chow +852 3922 3768 [email protected]

Cici Yu +86 21 2412 9078 [email protected]

Hugo Shen +86 21 2412 9077 [email protected]

China consumer tour takeaways Hainan: positive outlook with policy tailwinds

Key points FTZ brings in new opportunities, while duty-free policy relaxation continues. Diversifying tourism products and improving transportation facilities could

attract more tourists. CITS could be a major beneficiary.

Conclusion

We hosted a visit to Hainan and met with companies/experts in the duty-free shopping, tourism/leisure, retail and airport sectors. Overall we see a positive outlook for Hainan with the policy tailwinds from the Pilot Free Trade Zone (FTZ) and offshore duty-free quota relaxation, while diversifying tourism products and improving transportation facilities could continue to attract tourists. We believe CITS could be a major beneficiary with expected consolidation in the offshore duty-free market.

Impact

FTZ brings in new opportunities, while duty-free policy relaxation continues. As the largest FTZ in China, Hainan FTZ has been introducing a great number of preferential policies to attract capital, enterprises, and talent, both domestic and from overseas, and has already seen some positive feedback. Its ultimate goal is to become a Free Port. As for duty-free shopping, sales has experienced positive growth after the latest round of quota raise, while the openings of two new DFS could make further contributions. The continuous policy relaxation supports our view that the government aims to develop Hainan into a duty-free shopping mecca.

Diversifying tourism products and improving transportation facilities could attract more tourists. To best utilize its abundant tourism resources, Hainan has been diversifying its tourism product offerings. While traditional entertainment sites and performance shows maintain their momentum, premium-oriented sites like Atlantis Sanya have started to welcome visitors. New products in health tourism, cultural/digital tourism, meetings, incentives, conferences and exhibitions (MICE), and sports tourism are gaining more attention. In terms of transportation, Hainan is expanding its airport capacities with expansion/upgrades to old airports and construction of new airports, while rail/highway transport is developing fast.

CITS could be a major beneficiary. From our site visits and expert meetings, we maintain our positive view on China International Travel Service (CITS). We think its Sanya DFS could benefit from the quota relaxation, while expected share injection from Hainan Duty Free could allow CITS to gain control over all four DFS in Hainan. We believe CITS can maintain a favourable position in the offshore duty-free market at least in the mid-term.

Outlook

We maintain our cautious view on the consumer sector and suggest investors wait for downward consensus earnings revisions to be completed. Top sells: Hengan, Dali, CRB, Samsonite; top buy: CITS. We also suggest revisiting China Modern Dairy, Want Want, Yili, WH Group.

http://www.macquarie.com/research/disclosures

https://www.macquarieresearch.com/directory/people/details?analystId=380

mailto:[email protected]









Macquarie R

esearch C

hina consumer tour takeaw

ays

28 January 2019 2

HK/China consumer valuation table

Fig 1 HK/China consumer valuation table(1)

Company Code Price Rating TP Upside Mkt Cap P/E(X) P/B(X) ROE (%) EPS Growth (%) PEG Div yield (%) FCF yield (%) (lcy/sh) (lcy/sh) (%) US$m 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2019E 2018E 2019E 2018E 2019E

Department stores Golden Eagle 3308 HK 8.26 OP 11.70 42% 1,781 10.8 9.9 1.9 1.7 17.7 17.8 -13.2 8.8 1.1 4.4 4.8 5.4 0.4 Lifestyle 1212 HK 11.74 OP 17.50 49% 2,182 10.0 9.0 3.9 3.2 42.5 39.3 38.8 11.0 0.8 5.4 5.4 10.3 8.6 Luxury Samsonite 1910 HK 22.10 UP 18.40 -17% 4,031 19.3 17.2 2.2 2.1 15.4 13.5 5.7 -8.3 -2.1 2.0 2.2 -1.1 1.9 Prada 1913 HK 25.05 OP 43.00 72% 7,909 20.9 18.5 2.3 2.2 11.6 12.1 39.1 12.7 1.5 3.4 3.8 4.8 4.0 Chow Tai Fook 1929 HK 6.50 Neutral 5.70 -12% 8,068 15.9 14.8 1.9 1.9 12.6 12.9 36.3 7.3 2.0 8.8 5.0 -3.0 4.3 Luk Fook 590 HK 22.35 UP 18.80 -16% 1,669 9.6 9.0 1.3 1.2 14.5 14.0 34.8 7.0 1.3 4.0 4.9 3.0 0.3 Chow SangSang 116 HK 11.28 OP 22.70 101% 934 6.8 6.0 0.7 0.6 10.6 11.2 46.7 14.3 0.4 5.9 6.6 15.6 15.6 Lao Feng Xiang 600612 CH 42.11 OP 62.00 47% 2,714 15.0 13.0 3.2 2.8 23.0 22.9 13.8 15.2 0.9 2.4 2.9 -15.9 30.5 Sportswear Anta Sports 2020 HK 37.45 OP 42.00 12% 12,507 21.1 17.6 5.6 5.0 28.3 30.1 33.3 20.0 0.9 3.6 4.4 3.9 4.5 Li Ning 2331 HK 9.42 Neutral 9.20 -2% 2,709 28.3 21.8 3.4 2.9 12.7 14.5 33.9 30.1 0.7 0.0 0.0 1.9 4.5 Cosmetics SaSa 178 HK 2.78 Neutral 2.80 1% 1,119 19.0 16.9 3.4 3.5 18.7 20.3 30.8 12.3 1.4 6.3 6.5 6.9 2.0 L' Occitane 973 HK 13.80 Neutral 13.70 -1% 2,696 23.6 21.6 2.4 2.3 10.4 10.9 -26.9 9.2 2.3 1.9 2.1 4.6 5.0 Shanghai Jahwa 600315 CH 27.68 UP 20.20 -27% 2,625 42.8 45.1 3.2 3.0 7.8 6.9 33.2 -5.2 -8.7 1.5 1.5 1.4 -2.5 Home appliance retailers GOME 493 HK 0.67 UP 0.40 -40% 1,813 NA NA 0.8 0.9 -5.2 -3.3 107.6 -51.7 NA 0.0 0.0 -14.6 -21.2 Suning 002024 CH 10.77 Neutral 14.00 30% 14,894 1,453.2 154.8 1.3 1.3 0.1 0.8 -143.4 839.0 NA 0.9 0.1 0.0 0.0 Haier Electronics 1169 HK 21.00 OP 21.80 4% 7,217 13.0 11.8 2.1 1.9 17.5 16.9 16.4 10.8 1.1 1.3 1.8 2.5 6.4 Qingdao Haier 600690 CH 15.31 OP 17.20 12% 13,412 14.0 12.5 2.3 2.0 18.4 17.4 18.4 12.6 1.0 2.5 2.7 -2.0 15.4 Midea Group 000333 CH 41.59 OP 50.00 20% 39,580 13.8 12.5 3.1 2.7 24.3 23.1 24.8 10.4 1.2 3.4 3.9 10.8 7.9 Gree 000651 CH 39.38 Neutral 39.00 -1% 34,259 8.5 9.1 2.6 2.2 36.0 26.8 31.8 -6.5 -1.4 4.6 4.5 12.1 11.3 Hanzhou Robam 002508 CH 24.96 Neutral 18.90 -24% 3,221 16.0 13.7 3.9 3.3 26.1 26.3 5.3 17.1 0.8 3.2 3.6 6.8 6.5 Home improvement Man Wah 1999 HK 3.82 Neutral 3.50 -8% 1,720 11.0 10.4 2.5 2.1 24.2 21.7 -10.3 6.0 1.7 6.5 3.3 5.8 -0.3 OEM Shenzhou 2313 HK 91.85 OP 103.40 13% 17,243 25.2 21.2 5.4 4.8 22.8 24.0 22.2 18.6 1.1 1.9 2.3 3.5 3.6 Stella Intnl 1836 HK 10.22 OP 13.00 32% 1,055 18.6 11.9 1.1 1.1 5.8 9.1 -10.2 56.7 0.2 3.6 5.9 6.2 6.2 Pacific Textile 1382 HK 6.82 OP 9.10 40% 1,241 13.3 10.2 2.9 2.8 22.8 28.2 -20.0 29.9 0.3 6.6 8.3 4.1 7.2 Li & Fung 494 HK 1.33 OP 1.91 51% 1,420 9.8 8.3 0.6 0.6 5.6 7.1 6.1 17.0 0.5 7.2 8.4 -6.0 8.4 Yue Yuen 551 HK 25.80 OP 27.50 7% 5,141 16.1 13.0 1.3 1.2 7.8 9.6 -33.1 24.4 0.5 5.9 5.9 1.5 2.4 Tourism CITS 601888 CH 56.00 OP 71.40 28% 17,487 34.2 25.1 6.8 5.7 21.1 24.6 26.4 36.3 0.7 0.9 1.2 2.5 3.8 CYTS 600138 CH 12.95 OP 14.50 12% 1,402 14.8 15.2 1.5 1.4 10.7 9.5 9.8 -2.3 -6.7 0.8 0.8 17.4 -10.1 Restaurant and supply chain YUM China YUMC US 35.29 Neutral 34.00 -4% 13,431 20.5 20.3 4.1 3.5 22.3 18.9 67.2 1.1 19.2 1.3 1.3 6.4 5.3 Café de Coral 341 HK 20.85 OP 23.90 15% 1,511 26.5 22.7 3.4 3.5 13.0 15.3 -9.4 16.7 1.4 5.6 3.9 3.6 3.6 Xiabu Xiabu 520 HK 11.40 OP 15.00 32% 1,572 23.1 18.9 4.7 4.1 21.7 23.1 9.5 22.6 0.8 2.9 3.0 6.3 2.3 Gourmet Master 2723 TT 214.00 Neutral 250.00 17% 1,207 18.0 18.4 3.5 3.1 23.2 19.9 22.8 -2.1 -8.9 2.7 2.5 5.1 5.8 Yihai 1579 HK 22.35 Neutral 18.20 -19% 2,949 42.9 30.2 10.5 8.1 27.6 30.3 81.0 42.0 0.7 0.9 1.3 0.5 2.7 Haitian 603288 CH 72.45 OP 69.00 -5% 28,756 45.3 37.9 14.1 12.0 33.7 34.1 27.8 19.4 2.0 1.2 1.5 2.8 1.9 TCI 8436 TT 438.00 OP 618.00 41% 1,533 32.7 24.2 10.0 7.6 34.9 35.8 87.9 35.5 0.7 1.0 1.4 2.1 3.3 Consumer Discretionary - Average ex Suning 20.0 17.2 3.6 3.1 3.3 3.5 3.4 4.5 Source: Bloomberg, Macquarie Research, January 2019; prices as of 24 January 2019

Macquarie R

esearch C

hina consumer tour takeaw

ays

28 January 2019 3

HK/China consumer valuation table (con’t)

Fig 2 HK/China consumer valuation table(2)

Company Code Price Rating TP Upside Mkt Cap P/E(X) P/B(X) ROE (%) EPS Growth (%) PEG Div yield (%) FCF yield (%) (lcy/sh) (lcy/sh) (%) US$m 2018E 2019E 2018E 2019E 2018E 2019E 2018E 2019E 2019E 2018E 2019E 2018E 2019E

Grocery retailers Sun Art 6808 HK 7.93 OP 11.30 44% 9,581 24.1 21.7 2.7 2.5 11.7 12.0 -2.9 10.8 2.0 1.7 1.8 2.7 4.9 Lianhua 980 HK 1.23 UP 1.50 22% 171 NA NA 0.7 1.0 -17.0 -19.5 13.6 -15.7 NA 0.0 0.0 -68.4 -47.4 Yonghui 601933 CH 8.16 UP 4.30 -46% 11,462 77.5 49.1 3.8 3.8 5.0 7.7 -42.5 57.8 0.8 1.6 1.9 -4.1 -3.8 President Chain Store 2912 TT 321.00 Neutral 298.00 -7% 10,589 31.7 29.3 9.4 8.9 24.5 31.2 -66.0 8.0 3.7 2.7 2.9 3.0 3.1 Taiwan Familymart 5903 TT 224.00 OP 225.00 0% 1,634 30.3 27.5 8.9 8.4 30.6 31.4 17.2 10.3 2.7 2.9 3.2 2.3 2.5 Consumer staples Want Want China 151 HK 6.10 OP 7.70 26% 9,853 21.2 19.0 4.6 4.3 23.3 23.1 N.A 11.3 1.7 2.4 2.6 7.4 5.6 Dali Foods 3799 HK 5.15 UP 4.30 -17% 9,914 16.3 14.2 4.0 3.5 25.8 26.1 9.1 14.7 1.0 3.1 3.5 4.5 3.7 Tingyi 322 HK 10.56 Neutral 11.30 7% 7,575 20.3 18.6 2.6 2.4 13.1 13.3 38.8 9.2 2.0 2.5 2.7 7.8 8.9 WH Group 288 HK 6.84 OP 8.90 30% 12,476 14.3 11.6 1.6 1.4 11.6 13.0 -22.7 23.3 0.5 3.1 3.8 7.6 8.0 Shuanghui 000895 CH 24.50 Neutral 22.70 -7% 11,908 16.0 16.2 5.0 4.7 32.7 29.9 16.8 -1.0 -17.0 5.2 5.2 7.4 6.5 Uni-President China 220 HK 6.88 Neutral 8.50 24% 3,771 23.3 20.7 1.9 1.9 8.4 9.2 25.5 12.9 1.6 3.0 3.4 4.6 4.2 Uni President Enterprises 1216 TT 72.40 Neutral 75.20 4% 13,415 23.9 21.3 3.9 3.7 15.2 17.7 -56.8 12.0 1.8 3.3 3.7 3.2 5.9 Hengan 1044 HK 57.45 UP 51.00 -11% 8,923 16.2 16.6 3.5 3.3 22.3 20.2 -2.3 -2.9 -5.7 4.1 4.0 5.8 5.5 Moutai 600519 CH 672.50 OP 707.00 7% 121,991 25.8 23.7 7.7 6.5 32.5 29.8 20.3 9.0 2.6 2.0 2.1 3.8 4.2 Yanghe 002304 CH 99.06 OP 123.20 28% 21,646 19.4 17.0 4.4 3.9 24.2 24.3 25.1 14.4 1.2 3.2 3.6 6.7 6.3 Tsingtao H 168 HK 33.95 Neutral 30.40 -9% 6,572 40.6 34.2 2.5 2.4 6.4 7.2 15.8 18.7 1.8 1.6 1.8 5.8 5.0 Wuliangye 000858 CH 55.20 Neutral 52.30 -2% 29,687 17.2 15.9 3.4 3.1 21.2 20.4 26.1 8.5 1.9 3.1 3.3 5.8 6.0 Tsingtao A 600600 CH 36.58 Neutral 39.70 10% 6,563 41.5 33.6 2.7 2.6 6.8 7.9 22.0 23.5 1.4 1.3 1.6 6.0 5.1 CRB 291 HK 27.90 UP 20.20 -27% 10,936 33.8 34.6 4.6 4.3 14.1 13.0 40.2 -2.1 -16.8 0.8 0.9 2.3 5.0 Dairy & Infant formula China Modern Dairy 1117 HK 0.84 OP 1.34 60% 641 5.7 4.9 0.7 0.6 11.4 13.3 80.4 15.4 0.3 0.0 0.0 -8.4 -1.5 China Mengniu 2319 HK 25.20 UP 16.00 -37% 12,615 33.1 32.1 3.4 3.2 10.9 10.3 25.3 3.0 10.9 0.7 0.7 -0.6 3.5 Bright Dairy & Food 600597 CH 8.45 Neutral 8.00 -5% 1,521 19.8 17.8 1.8 1.7 9.5 10.0 -22.4 10.8 1.7 1.4 1.6 -1.2 4.2 Yili 600887 CH 24.34 OP 27.10 11% 21,551 25.5 23.1 5.4 5.0 22.2 22.6 -2.7 10.3 2.2 2.0 2.2 5.7 2.6 Health & Happiness 1112 HK 43.70 Neutral 44.30 1% 3,526 22.4 17.9 4.5 3.6 22.6 22.6 15.2 25.1 0.7 0.0 0.0 7.0 7.6 Yashili 1230 HK 1.30 OP 1.97 52% 780 110.5 38.4 1.0 0.9 0.9 2.5 -126.9 188.1 0.2 0.0 0.0 -10.7 0.3 Greatview 468 HK 5.16 OP 5.20 1% 838 16.7 15.9 2.4 2.4 14.7 15.0 4.0 5.0 3.2 5.4 5.3 2.6 6.4 Consumer Staples - Average ex Yashili 26.1 22.6 3.9 3.6 2.2 2.4 0.7 2.3 Source: Bloomberg, Macquarie Research, January 2019; prices as of 24 January 2019

Macquarie Research China consumer tour takeaways

28 January 2019 4

Introduction to Hainan Hainan is the southernmost and smallest province of China, in terms of land area, with Hainan Island making up the majority of the land. Haikou, on the northern coast, is the provincial capital while Sanya, on the southern coast, is a popular tourist destination.

Hainan’s GDP growth has outpaced the national level over 2007-2017 (Fig 3). Hainan recorded total GDP of Rmb446bn in 2017, representing 7% GDP YoY growth. The primary sectors (agriculture, forestry, animal husbandry, and fishery) contributed 21.6% of total GDP, secondary sectors (manufacturing and construction) contributed 22.3%, and the tertiary sector (services) accounted for 56.1%. Looking into specific services industries, wholesale & retail represented ~11% of total GDP, while real estate and hotels & catering services contributed ~10% and ~5% of total GDP, respectively. At 2017 year-end, Hainan is home to ~9.3mn residents, while GDP per capita was Rmb48,430 in 2017.

For 2018, Hainan’s GDP could reach ~Rmb500bn, representing 7.9% YoY growth or 6% YoY growth if excluding real estate, according to a Director from Hainan Development and Reform Commission. This growth rate should continue to outpace the national level.

Fig 3 Hainan historical GDP and YoY growth

Source: Wind, NBS, Hainan Bureau of Statistics, Macquarie Research, January 2019

Hainan’s tourism industry has kept strong growth momentum

During 2017, a total of 67.5mn tourists visited Hainan (Fig 4). Hainan’s growth rate outpaced that of overall Chinese domestic tourist arrivals in 2015/2016 but slightly fell behind in 2017 (Hainan: +12.0%, overall domestic: +12.6%). As for tourism revenue growth (Fig 5), Hainan consistently outpaced overall domestic over 2014-2017. During the same period, the growth rate of Chinese outbound tourists was consistently lower than that of domestic tourists and Hainan’s tourist arrivals.

Around 98% of overnight tourists to Hainan are domestic visitors (Fig 6). Starting in May 1, 2018, Hainan extended its visa-free policy to individual tourists from 59 countries/districts for a maximum 30-day period of stay. Foreign tourist visitation has seen positive growth after this policy relaxation; however, growth was not significant due to a lack of international flights, according to a Director from the Hainan Tourism and Culture Bureau. Therefore, an expansion of air transport capacity and an increase in international flights (which we will address later) would be key to attract more foreign visitors.

6%

8%

10%

12%

14%

16%

18%

0

100

200

300

400

500

600

Hainan GDP: primary sector Hainan GDP: secondary sector

Hainan GDP: tertiary sector Hainan GDP YoY growth

China GDP YoY growthRmb bn


28 January 2019 5

Fig 4 Tourist arrivals to Hainan Fig 5 Hainan tourism revenue

Source: Wind, Hainan Tourism Bureau, NBS, China Tourism Academy, Macquarie Research, January 2019

Source: Wind, Hainan Tourism Bureau, NBS, Macquarie Research, January 2019

Fig 6 Hainan overnight tourists by country/region

Source: Wind, Hainan Tourism Bureau, Macquarie Research, January 2019

Based on our meeting with Hainan government officials, we think Hainan has the following advantages over other domestic tourist destinations:

A unique climate. Hainan is one of the few places in China with a tropical climate. The warm weather in the winter and unique tropical flora/fauna are very attractive to visitors, especially those from the Northern China.

One of the best natural conditions in the country. Hainan has a forest coverage rate of 62%, and is home to 49 nature reserves. The percentage of days with good air quality can reach 98.9%, while Level 1 and Level 2 (the two highest levels for sea waters) sea waters account for 94.6% in the offshore area.

Special position as the duty-free island. The implementation of an offshore duty-free policy has enhanced Hainan’s attractiveness as a destination for duty-free/high-end consumption. The strong travel retail sales in Hainan correspond with the higher growth rate of its tourism revenue as compared to the overall domestic level.

0%

5%

10%

15%

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017

Tourist arrivals to Hainan Tourist arrivals to Hainan YoY

Chinese domestic tourists YoY Chinese outbound tourists YoYmn

0%

5%

10%

15%

20%

25%

0

10

20

30

40

50

60

70

2013 2014 2015 2016 2017

Hainan tourism revenueHainan tourism revenue YoYChina domestic tourism revenue YoYRmb bn

95%

96%

97%

98%

99%

100%

2011 2012 2013 2014 2015 2016 2017 10M2018

Domestic International HK, Macau and Taiwan


28 January 2019 6

The advertising effect from Bo’ao Forum for Asia (BFA), which could attract more organizations and visitors for MICE activities.

Compared to international tourist destinations especially those in the same region (like Southeast Asia), Hainan has the following advantages:

For Chinese tourists, they need to apply for visas when travelling to Southeast Asia (A few countries like Thailand issue visas on arrival for Chinese tourists). For Hainan, they can simply pack and go, even without holding a passport.

For foreign visitors, Hainan’s visa-free policy has also made it easier to visit Hainan for citizens from those listed regions. Hainan could be a good option for those who are interested in visiting China but do not hold a Chinese visa.

Air transport is going through capacity expansion

Hainan has two major airports, Haikou Meilan International Airport (HAK) and Sanya Phoenix International Airport (SYX). In 2018, the total passenger throughput in Meilan Airport and Phoenix Airport exceeded 24mn and 20mn, respectively. The fast growth in passenger throughput at the two airports could be seen as a reflection of the booming tourism industry.

On the other hand, the growing passenger throughput has put these two airports under pressure as both are operating above their designed capacity. In order to meet the growing demand, Hainan has been expanding its air transport capacity.

Meilan Airport expansion

For Meilan Airport, the Phase II expansion space will be put into operation by 2019 year-end and should raise the airport’s designed capacity to 35mn passenger throughput, according to management from the airport’s operator Regal International (357 HK, Non-rated).

Potential new Sanya airport

For Sanya, the construction of a new airport in Sanya is on schedule, but we should look at longer term as this airport will be built through land reclamation.

Bo’ao Airport upgrade

Apart from Haikou and Sanya, the government is also planning to upgrade Bo’ao Airport into an international airport.

New airports in the plan

Meanwhile, they have also started to prepare for the construction of new airports in Danzhou (in Northwest Hainan) and either Dongfang (in Western Hainan) or Wuzhishan (in Central Hainan). Please refer to the Map in Fig 9 for the airport locations.

Hainan currently has ~60 international air routes. The government is trying to increase the number of international routes and they reward each new international route a subsidy of Rmb10mn-20mn. According to Regal International’s management, Meilan Airport currently has 303 air routes including 46 international routes.

Out of their 24mn total passenger throughput in 2018, international passengers accounted for less than 5%. For 2019, they will focus on international routes expansion and are looking into destinations in Japan/Russia/Middle East/Europe. They are hoping that more direct international flights, in addition to the visa-free policy, could help to attract more international passengers in the future.


28 January 2019 7

Fig 7 Haikou Meilan Airport passenger throughput Fig 8 Sanya Phoenix Airport passenger throughput

Source: Company filings, People.cn, Macquarie Research, January 2019 Source: CARNOC.com, People.cn, Macquarie Research, January 2019

Fig 9 Map of Hainan Island with airport locations

Source: Google Map, Macquarie Research, January 2019

Rail and highway transport are developing fast

Hainan has built a circular high-speed railway system connecting Haikou and Sanya, consisting of the Eastern Circular Line and the Western Circular Line. It takes less than 90 minutes from Haikou to Sanya through the fastest trains. The Guangdong-Haikou railway system connects Hainan with Zhanjiang City in Guangdong Province, crossing the Qiongzhou Strait with railway ferries. The cross-strait tunnel is still at an early planning stage.

0%

5%

10%

15%

20%

25%

-

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014 2015 2016 2017 2018

Passenger throughput ('000) YoY

0%

5%

10%

15%

20%

-

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014 2015 2016 2017 2018



28 January 2019 8

The railway passenger traffic in Hainan has been growing fast. As shown in Fig 10 below, during 2016, the railway traffic surged 38% following the opening of the Western Circular Line at 2015 year end. During the first 11 months of 2018, the traffic grew 11.2% to 27.2mn, which is close to the full-year traffic of 2017.

As for highway transport, Hainan’s highway mileage exceeded 30,000 km in 2017. Hainan has constructed a large expressway network consisting of three West-East lines, one North-South line, and a circular expressway system. Every city and county is accessible via the expressway. They are now planning to construct a sightseeing circular highway spanning over 1,000 km, while some facilities for unmanned driving will be pre-installed under the ground.

With the rail and highway transport connecting the island, we could expect more visitations to the other regions outside Haikou/Sanya. This could help to boost development of these regions and ease the regional imbalance.

Fig 10 Hainan railway passenger traffic Fig 11 Hainan highway mileage

Source: Wind, Hainan Bureau of Statistics, Hainan Bureau of Statistics, Macquarie Research, January 2019

Source: Wind, NBS, Macquarie Research, January 2019

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

-

5,000

10,000

15,000

20,000

25,000

30,000

Railway passenger traffic ('000) YoY

20,000

22,000

24,000

26,000

28,000

30,000

32,000

2010 2011 2012 2013 2014 2015 2016 2017

km


28 January 2019 9

Pilot Free Trade Zone brings in new opportunities A Free Trade Zone (FTZ) refers to a geographic area within the national border where goods may be imported, stored, manufactured, and re-exported under specific customs regulation and generally not subject to customs duty. The Chinese government has decided to set up FTZs to enhance economic opening and support the transformation and upgrade of China’s economy.

On 16 October 2018, the State Council approved the establishment of the Hainan Pilot Free Trade Zone, making Hainan the 12th and largest-to-date FTZ in China. As addressed by the Overall FTZ Plan (link), the Hainan FTZ will focus on the opening of the economy with special focus on the development of tourism, modern services, and high-tech industries. A summary of the FTZs in China is listed below:

Fig 12 Pilot Free Trade Zones (FTZs) in China FTZ Area (s.q.km) Established on Zones

Shanghai 120.72 29-Sep-13 7 in Pudong New Area Guangdong 116.20 21-Apr-15 3, located in Guangzhou, Shenzhen, and Zhuhai respectively Tianjin 119.90 21-Apr-15 3 Fujian 118.04 21-Apr-15 3, located in Fuzhou, Xiamen, and Pingtan respectively Liaoning 119.89 1-Apr-17 3, located in Dalian, Shenyang, and Yingkou respectively Zhejiang 119.95 1-Apr-17 3 in Zhoushan Henan 119.77 1-Apr-17 3, located in Zhengzhou, Kaifeng, and Luoyang respectively Hubei 119.96 1-Apr-17 3, located in Wuhan, Xiangyang, and Yichang respectively Chongqing 119.98 1-Apr-17 3 Sichuan 119.99 1-Apr-17 3, including 2 in Chengdu and 1 in Luzhou Shannxi 119.95 1-Apr-17 3 in Xi'an Hainan ~35,400.00 Approved on

16-Oct-18 The whole Hainan Island

Source: FTZ websites, Macquarie Research, January 2019

Existing FTZs could provide good implications for Hainan

China’s FTZs offer a variety of preferential policies for enterprises setting up there. Taking Shanghai FTZ (SHFTZ) for example, the major benefits for enterprises are:

The application of a “Negative List” which treats all foreign investments outside the list equally with domestic investments. The registration of foreign projects in SHFTZ follows a simple filing process, as compared to sophisticated examination and approval process elsewhere.

Lower entry barriers and relaxed shareholding limit for foreign investments across various services and manufacturing sectors.

The approval of investments abroad below the amount of US$ 300mn can follow a filing process which takes only three working days, as compared to three to six months elsewhere.

A convenient customs clearance model. For goods crossing the border between SHFTZ and overseas territories, the process is significantly simplified. This could improve the efficiency of delivery and lower relevant costs.

Financial innovation. The usage of Free Trade Account, and overseas local/foreign currency financing are applied in SHFTZ.

After five years of development, the cumulative number of newly registered enterprises in SHFTZ has reached 57k including 8.7k foreign enterprises, and the cumulative amount of foreign capital has reached US$ 22.1bn.

The growing number of enterprises in FTZs has also brought many job opportunities. As reported by news, one HR specialist from Zhaopin.com estimated that the average demand for talent from each FTZ is ~50k per year.

It becomes more convenient for foreign residents to work or start a business in FTZs. For foreign students who graduated from a university in Shanghai with a Bachelor’s Degree or above, they can directly work in SHFTZ without the two-year working experience required elsewhere. SHFTZ also provides high-level foreign talents with an opportunity to apply for a Chinese permanent residence card.

http://www.gov.cn/zhengce/content/2018-10/16/content_5331180.htm

http://www.changjiangtimes.com/2017/04/564080.html


28 January 2019 10

We believe the experience from existing FTZs like Shanghai FTZ provide good implications for Hainan FTZ. With the whole island covered in FTZ (27 times as large as the total area of the other 11 FTZs), Hainan bears even greater potential than existing FTZs with its strategic location and advantages in multiple sectors.

Hainan FTZ will focus on service trade

We had a meeting with Hainan government’s officials and got first-hand information regarding the FTZ development. Unlike Hong Kong and Singapore which started with entrepot trade and shipping business, Hainan will rely more on favourable policies for service trade due to its own industrial characteristics. Their “Negative List” for cross-border service trade will be the shortest one in the country and applies to the whole island.

According to the Deputy Director from Hainan Commerce Bureau, Hainan FTZ will cancel the limitation on foreign shareholdings across specific communications, hospitals, ship/airplane manufacturing & maintenance, and performance agency sectors, while relaxing on the registration of foreign banks, entertainment venues, and airline sales agents. They will also allow travel agencies/education agencies via a JV form of domestic and foreign capital.

Several kinds of industrial merchandise that are used in Hainan are exempt from import duties, including important facilities for airplane maintenance, medical equipment, and large-scale entertainment facilities. This exemption is open to business usage only, while a further opening to consumer goods is not realistic in the short term.

The government also encourages the development of cross-border ecommerce. The Haikou Integrated Free Trade Zone has first opened direct sales of imported goods to domestic customers (B2C model). However, the high costs of transportation, logistics, and telecommunication between Hainan and overseas source market would be major challenges, as noted by the government officials.

Hainan has advantages compared to existing FTZs, while challenges remain

Compared to existing FTZs, Hainan has the following advantages:

The vast land area provides more opportunities and possibilities for deeper reform and opening

Hainan FTZ covers more industries than other FTZs, with industries like tropical agriculture, environmental protection, and marine economy unique to Hainan

Full support from the central government

Among all FTZs, Hainan is the only one designed as a Free Port (in the long-term)

However, Hainan also needs to overcome the following drawbacks and challenges on their path:

The low urbanization rate is the biggest concern. Rural areas occupy 80% of land, rural population account for 60% out of total, and primary sector contribute 20% of GDP.

An economy twisted by real estate. In 2017, real estate contributed 49% of tax revenue and 51% of investment. The government has tightened the real estate regulations and the new real estate purchase policy is one of the strictest in China.

Shortage of talent, especially industrial high-end and international talent.

High living expenses.

To address the shortage of talent, Hainan has launched a “One Million Talent Plan”, aiming to attract 200k talent by 2020 and 1mn talent by 2025. Hainan will provide one-stop services for incoming talent, with favourable policies covering housing, citizenship (the Chinese “Hukou”), partner’s employment, and children’s education. The Haikou Harrow School will begin enrolling new students from 2020, and more international schools will be introduced into Hainan.

The preferential policy and future potential of Hainan have started to attract companies. According to the news, as of 28 December 2018, 58 companies have applied for Headquarters Enterprise recognition in Hainan, and 30 companies have been granted the title. Big names among them include Taiping, CNPC Hainan, Alibaba Hainan, and CDFG Hainan. Foreign capital has been flowing onto the island, with the number of newly registered foreign enterprises up 55% to 130 during January-November 2018 (link). We believe more enterprises and capital will come to Hainan to take advantage of the opportunities.

http://xinwen.eastday.com/a/181228140025931.html?xx=1

http://www.hnzhengfa.gov.cn/hnxw/7234.jhtml


28 January 2019 11

Duty-free policy relaxation continues Originally introduced in 2011 to attract tourists, Hainan’s offshore duty-free policy has gone through several rounds of relaxation. A summary of the policy changes is listed in Fig 11, while Fig 12 shows duty-free sales (and sales growth) along with the timing of major policy relaxation.

The main contents of the duty-free policy effective in different periods are:

Before November 2012: Non-Hainan residents were allowed to purchase duty-free products twice per year with a limit of Rmb5,000 per visit; Hainan residents could purchase once per year with a limit of Rmb5,000. In addition, each customer could purchase one piece of fully-taxed goods with unit price over Rmb5,000 per visit. Customers need to be at least 18 years old.

November 2012 - January 2016: Age limit lowered to 16; Non-Hainan residents were allowed to purchase duty-free products twice per year with a limit of Rmb8,000 per visit; Hainan residents could purchase once per year with a limit of Rmb8,000. Each customer could purchase one piece of taxable goods with unit price over Rmb8,000 per visit, and pay parcel tax after deducting their remaining duty-free quota (up to Rmb8,000) from tax base.

February 2016 – November 2018: Non-Hainan residents could purchase duty-free products with an annual limit of Rmb16,000 and no restriction on purchase frequency.

December 2018 onwards: All customers are allowed to purchase duty-free products with an annual limit of Rmb30,000 and no restriction on purchase frequency.

Duty-free sales saw positive growth after quota raise in Dec 2018

As purchase quota goes up, the product categories gradually expands as well, reaching 39 categories in Dec 2018 as compared to 18 categories in the very beginning(Fig 13). The amount limit for each product category has also been relaxed. One customer can now purchase up to eight pieces of perfume products and 12 pieces of cosmetics products per visit, as compared to two pieces of perfume products and five pieces of cosmetics products before Nov 2012.

From Fig 14 we can see clear seasonality in Hainan’s duty-free sales trend which coincides with its tourism cycle: sales peak in February each year as winter is traditional tourist season in Hainan while the Spring Festival holiday acts as another accelerator; on the contrary, the summer months like June and July have witnessed sales lows as weather in Hainan becomes too hot for visitors.

Historically, policy relaxation has helped to boost duty-free sales growth. Following the first quota lift in November 2012, sales jumped in the beginning of 2013 with significant growth in February (+122% YoY). In February 2016, despite a high comparison base, duty-free sales recorded +18% YoY growth, which could also be partially attributable to the policy relaxation.

Following the latest round of policy change, the Sale Manager from Sanya DFS noted the store achieved noticeable improvement in terms of sales and ASP. For Haikou Airport DFS, they are also seeing growth acceleration after the policy change, but not as significant as what they expected, according to their Deputy General Manager. We believe this could be partially due to the fact that they are currently going through a transition period for supplier change. Overall, we are positive on the policy relaxation and believe this quota raise is likely to further push Hainan DFS ASP up, given the high magnitude of the quota jump.

Fig 13 Changes of offshore duty-free policy in Hainan

Date Age limit

Purchase quota (Rmb) Purchase frequency limit per year Product

categories Taxable goods

(unit price > Rmb 5,000 before Nov -2012/>Rmb 8,000 afterwards)

Others Non-Hainan

residents Hainan

residents Non-Hainan

residents Hainan

residents

20-Apr-11 18 5,000 per visit 5,000 per visit

2 times 1 time

18 1 piece per visit (fully taxed) set purchase amount limit on each category

1-Nov-12

16

8,000 per visit 8,000 per visit

21 (+3) 1 piece per visit unused quota (up to 8,000) deducts

tax base

relax purchase amount limit on certain categories

20-Mar-15 38 (+17) relax purchase amount limit on certain categories

1-Feb-16 16,000 per year No limit 38 1 piece per visit, 2 pieces per year unused quota (up to 8,000) deducts

tax base

launch online stores

1-Dec-18 30,000 per year No limit 39 (+1)

Source: Ministry of Finance, Macquarie Research, January 2019


28 January 2019 12

Fig 14 Hainan duty-free sales growth and policy changes (added data for Oct/Nov 2018)

Source: Wind, Ministry of Commerce, Macquarie Research, January 2019

Looking annually, during 2017, Hainan duty-free sales grew 32% YoY to over Rmb8bn (Fig 15). The strong growth momentum continued into 1H18, with sales up 27% YoY to Rmb5.25bn. Along with the consistent double-digit growth in sales value, the ASP of Hainan duty-free consumption also witnessed steady improvement, rising from just over Rmb2,000/person in 2012 to over Rmb3,500 in 1H18 (Fig 16). This is in line with the several rounds of policy relaxation especially the quota raises, which could act as a catalyst for more consumption per visit.

Fig 15 Hainan duty-free sales and YoY growth Fig 16 Hainan duty-free ASP

Source: Wind, Ministry of Commerce, Macquarie Research, January 2019 Source: Wind, Ministry of Commerce, Macquarie Research, January 2019

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

-

100

200

300

400

500

600

700

800

900

1,000

1,100

1,200

1,300

1,400

1,500

201

2-0

1

201

2-0

4

201

2-0

7

201

2-1

0

201

3-0

1

2013

-04

201

3-0

7

201

3-1

0

201

4-0

1

201

4-0

4

201

4-0

7

201

4-1

0

201

5-0

1

201

5-0

4

201

5-0

7

201

5-1

0

2016

-01

201

6-0

4

201

6-0

7

201

6-1

0

201

7-0

1

201

7-0

4

201

7-0

7

201

7-1

0

201

8-0

1

201

8-0

4

201

8-0

7

201

8-1

0

Duty-free sales Duty-free sales YoY (RHS)

Nov 1, 2012: Quota lifted from Rmb5k/person/visit to Rmb8k/person/visit

Feb 1, 2016: For non-Hainan residents, quota changed to Rmb16k/person/year with no purchase frequency limit, compared to Rmb8k/person/visit with up to 2 purchases each year

Dec 1, 2018: Quota lifted to Rmb30k/person/year with no purchase frequency limit for both Hainan and non-Hainan residents

Rmb mn

10%

15%

20%

25%

30%

35%

40%

45%

50%

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

2012 2013 2014 2015 2016 2017 1H18

Hainan duty-free sales YoY growthRmb mn

2,054

3,000

3,239 3,241 3,292

3,436 3,564

2,000

2,200

2,400

2,600

2,800

3,000

3,200

3,400

3,600

3,800

2012 2013 2014 2015 2016 2017 1H18

Hainan duty-free ASPRmb/person


28 January 2019 13

Two new downtown DFS have started operation

There are currently four duty-free shops (DFS) in operation on the island. Sanya downtown DFS and Haikou Meilan Airport DFS are the old two, contributing around 75% and 25% of Hainan’s total duty-free sales in 2017 respectively. Meanwhile, The new Haikou downtown DFS and Bo’ao downtown DFS have just started operation from 19 January 2019.

We visited Sanya DFS and the new Haikou downtown DFS, and met with local DFS experts. We reassure our positive outlook for the duty-free business in Hainan, with local experts seeing duty-free as a major driver for Hainan’s tourist visitation growth. The opening of new DFS especially the Haikou downtown DFS should make strong contribution to the total duty-free sales growth.

Fig 17 Summary of DFS in Hainan DFS Location OFA (s.q.m.) Opening

from Operator

Sanya downtown DFS Sanya Haitang Bay 70,000 Sep-14 China Duty Free Group (CDFG, wholly-owned subsidiary of CITS) Haikou Airport DFS Haikou Meilan Airport 30,000 Dec-11 Haikou Meilan Airport Duty Free (51% owned by Hainan Duty Free) Haikou downtown DFS

Haikou downtown 13,000 (Phase 1) 22,000 (Total)

Jan-19 Hainan Duty Free (51% owned by CTS, controlling shareholder of CITS)

Bo'ao downtown DFS Bo'ao Forum for Asia venue 4,200 Jan-19 Hainan Duty Free (51% owned by CTS, controlling shareholder of CITS) Source: DFS representatives, CITS news, Macquarie Research, January 2019

Fig 18 DFS locations in Hainan



28 January 2019 14

CITS’ favourable position should remain intact at least in the mid-term

Both Haikou downtown DFS and Bo’ao downtown DFS are operated by Hainan Duty Free, which is now 51% owned by CITS’ parent organization CTS, as disclosed by CITS’ recent announcement. CITS also noted that CTS will begin to inject the 51% shareholding in Hainan Duty Free to CITS as soon as possible. After the injection, CITS will gain control over all the four DFS in Hainan (through a two-layer 51% shareholding structure for Haikou Meilan Airport DFS). We believe that CITS’ monopoly position and continuous consolidation could help enhance its negotiation power with brands and lower their purchase cost.

Although Hainan is planning to build a Free Port in which everything would become essentially duty-free, all the experts we met believe this should be a long-term process. According to one of the experts, the government is very careful in issuing duty-free licenses as duty-free business erodes government’s tax revenue directly, while only experienced duty-free operators will be allowed. He believes it is impossible to adopt the Free Port mode in terms of duty-free sales by 2025. We believe the duty-free license relaxation is unlikely to happen in the near future, and that CITS can maintain its favourable position at least in the mid-term.

Fig 19 Inside Sanya DFS Fig 20 Customers waiting in line in Sanya DFS

Source: Macquarie Research, January 2019 Source: Macquarie Research, January 2019

Fig 21 Haikou Airport DFS Fig 22 Inside Haikou downtown DFS


The unit price limit of Rmb8,000 is unlikely to relax in near term

As addressed by the offshore duty-free policy, each customer can purchase one item with a unit price higher than Rmb8,000 per visit, and up to two times per year with payment of parcel tax. If the customer has unused duty-free quota, it will be deducted from the tax base (up to Rmb8,000 deduction for each item) for parcel tax payment. Sanya DFS reimburses parcel tax for bags, suitcases, and apparel products, while the other DFS do not offer such reimbursement.

http://www.cninfo.com.cn/cninfo-new/disclosure/sse/bulletin_detail/true/1205782169?announceTime=2019-01-19


28 January 2019 15

According to the Sales Manager in Sanya DFS, the parcel tax dropped by an average of 5% from Nov 2018, which, in addition to the duty-free quota raise, will help them to save tax reimbursement cost. Currently the parcel tax rate is 50% for cosmetics, pearls, and watches over Rmb10k; 25% for leather goods, diamonds, and watches between Rmb8k – 10k; and 10-15% for other gem-set jewellery.

This unit price limit is unlikely to relax in the near term as noted by a local DFS expert, because the current DFS ASP is ~Rmb3,500-4,000 in Hainan, still far below the Rmb8,000 limit, while the government tend to change policy based on actual consumption data.

Duty-free market: China vs. Korea

With regard to the duty-free shopping business, a good reference for China to look at would be South Korea, which is the largest duty-free market in the world. In 2017, Korean duty-free sales increased 21% YoY to US$ 12.8bn (Fig 21). The growth rate accelerated to 37% for the first 11 months of 2018, leading to total sales of US$ 15.8bn.

According to CITS management, the estimated market size of duty-free shopping business in China stands at ~Rmb30bn (US$ 4.5bn). This only equals to 35% of Korean duty-free sales in 2017, suggesting huge growth potential for the Chinese market. As for Hainan, the offshore duty-free sales contribute approximately 25%-30% of total duty-free sales in China, while the remaining sales mainly come from airport DFS like Sunrise in Beijing and Shanghai.

The major difference between Korea and China should lie in outbound downtown shops. In Korea, downtown shops have contributed the highest proportion of duty-free revenue (77% in 2017). In China, however, downtown shops for outbound travellers are only open to foreign visitors as of now (Hainan’s downtown DFS are applicable to offshore policy), which limits the duty-free sales from this channel. Compared to airport DFS, downtown DFS allow for more flexibility in terms of accessibility and timing, serving as a better option for planned visits and large-scale purchase. Referring to the success of downtown shops in Korea, it could be expected that duty-free sales would see a substantial jump if outbound downtown shops are open to Chinese nationals. CITS management mentioned that they had been trying to get approval for such licenses, but it could take more time before we see some progress.

Compared to Korean DFS, Hainan DFS had a significantly higher ASP in 2013-2016, fluctuating at ~US$500 (Fig 22). However, due to the THAAD dispute, Chinese visitations to Korea slumped in 2017, creating rising demand for daigou. As a consequence, foreign customers’ ASP in Korea DFS roared to US$624 in 2017, surpassing Hainan DFS ASP for the first time. This trend continued in 1H18 with foreign customers’ ASP in Korea DFS further rising to US$746, as compared to US$553 for Hainan. According to our Korea consumer analyst Kwang Cho (link), over 70% of Korean duty-free sales could be daigou-related. This portion should be much lower for Hainan, as one Sales Manager estimated daigou accounting for <5% of sales in Sanya DFS. It could be implied that Hainan DFS should have more sustainable ASP compared to Korean peers.

Fig 23 Korea duty-free sales and YoY change Fig 24 Duty-free ASP: Korea vs. Hainan

Source: Korea Duty Free Association, Macquarie Research, January 2019 Source: Korea Duty Free Association, Wind, Ministry of Commerce, Macquarie Research, January 2019

0%

5%

10%

15%

20%

25%

30%

35%

40%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

Duty-free sales YoY change (RHS)

US$mn

141 137 132 111 107 109 121

270313

346 337369

624

746

326

489 523 513 493 512

553

0

100

200

300

400

500

600

700

800

2012 2013 2014 2015 2016 2017 1H18

Korea DFS ASP - domestic customers

Korea DFS ASP - foreign customers

Hainan DFS ASP

US$/person

https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7346810&file_name=KoreaCosmetics260418xe298905.pdf


28 January 2019 16

Crackdown on daigou benefits DFS and cross-border ecommerce

Daigou refers to a channel of commerce in which a person outside of China purchases commodities and resells them to customers in Mainland China. Previously in our Global Luxury report we estimated that the daigou market size for luxury goods alone is ~Rmb63bn-89bn as of 2018. We also mentioned the Chinese government’s crackdown on daigou including the introduction of a new Ecommerce Law which has become effective from 1 January 2019.

The new Ecommerce Law essentially requires that every daigou trader register their business, obtain necessary licenses, and pay tax in accordance with the law, which will shrink their profitability. Recent news reported that daigou traders have started to post hand-painted pictures to replace product photos, and use English advertisements instead of Chinese ones. We see these as temporary measures while the decline of daigou trades should be inevitable.

Our Korea consumer analyst Kwang Cho also projected in his Nov 2018 report that daigou activities will meaningfully decline from 2019 at Korean DFS. He noted that the Korean government has taken actions against daigou, such as enhanced monitoring of flight cancellation records and tightened restriction on “commercial” cargoes.

During our tour, local experts also mentioned several counteractions again daigou in Hainan, such as setting a consumption threshold for getting eligible to purchase certain best-sellers, and ID cross checks with customs.

We believe that Chinese DFS and formally registered cross-border ecommerce business will benefit from this crackdown. For DFS, they will become the cheapest channel when daigou exits. The product authenticity in DFS is also much more trustworthy. For cross-border ecommerce business, daigou traders are their direct competitors, so they could expect market share gains.

The Chinese government has continued to support DFS and cross-border ecommerce. For DFS, the policy relaxation in Hainan is a good example. For inbound cross-border ecommerce retail business, effective from 1 January 2019, the latest policy has raised the purchase quota to Rmb26k per year (from Rmb20k previously) and Rmb5k per purchase (from Rmb2k previously). Meanwhile, new product categories have been added, while the number of pilot cities have also been raised to 37 from 15 previously.

https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7361174&file_name=GlobalLuxuryGoods+121118e324351.pdf

https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7361174&file_name=GlobalLuxuryGoods+121118e324351.pdf

http://www.xinhuanet.com/comments/2019-01/04/c_1123945209.htm

https://www.macquarieresearch.com/rp/d/r/publication.do?f=C&pub_id=7360523&file_name=KoreaCosmetics061118e323657.pdf

http://www.gov.cn/zhengce/2018-12/08/content_5346963.htm


28 January 2019 17

Building an international tourism and consumption centre On 28 December 2018, the Chinese government released the Implementation Plan to build Hainan into an international tourism and consumption centre. The Plan stressed the following topics:

Building a global duty-free shopping centre and fashion consumption centre. On the one hand, offshore duty-free policy is now applied to all travellers leaving the island, while the policy relaxation continues. On the other hand, Hainan aims at attracting global fashion/luxury brands and professionals and becoming a leader to guide fashion goods consumption trends.

Diversifying tourism product portfolio, developing new products such as cruise, yacht, hot-air balloon, helicopter, gliding, skydiving, and islands tours.

Promoting health tourism with a focus on Bo’ao Lecheng International Medical Tourism Pilot Zone, a project with fast-track approval for new drugs, lower admission requirements for foreign physicians, and a reduction of tariffs on certain medical devices and equipment.

Developing cultural tourism and promoting new cultural consumption in animation/gaming, online culture, digital culture, digital reading, and intellectual property transactions.

Developing meetings, incentives, conferences and exhibitions (MICE) with a focus on Haikou, Sanya, and Qionghai cluster districts. Events mentioned include International Merchandise Expo, International Brand Expo, International Film Festival, International Fashion Week, and International Music Festival.

Encouraging the development of sports tourism covering beach sports, water sports, horse race, air sports, motor sports, and outdoor sports; exploring the development of certain lotteries.

New tourism products targeting premium customers

The new tourism products like extreme sports are likely to target premium customers, as the prices for such activities are usually high. We visited Sanya Atlantis operated by Fosun Tourism (1992 HK, Not rated), and we believe Atlantis provides a good example of the tourism product upgrade in Hainan. The project officially opened on 29 April 2018, offering 1,314 rooms with a rate ranging from ~Rmb3,400 for a standard room to ~Rmb108,888 for an underwater suite. Its occupancy rate increased from 42% in May 2018 to 73% in 3Q18. It also has a large open-air aquarium and a waterpark with an area of 200k square meters. Please refer to our MacVisit note on Fosun Tourism for more details.

Fig 25 Outdoor facilities in Atlantis Fig 26 Neptune Underwater Suite


http://www.ndrc.gov.cn/zcfb/zcfbtz/201812/W020181228360736329982.pdf


28 January 2019 18

Entertainment and performance shows maintain momentum

Traditional entertainment sites and performance shows are still attracting a significant number of tourists. Songcheng Performance’s (300144 CH, Not rated) “The Romantic Show of Sanya” ranks No.2 among all tourist attractions in Sanya on TripAdvisor, and its content is based on local culture in Hainan. We observed a full house for the show. The show performs three times a day with additional sessions during the Golden Weeks.

We also visited Sanya Haichang Fantasy Town operated by Haichang Ocean Park (2255 HK, Not rated). It is a large theme park featuring oceanarium shows and aquatic animals like whale sharks, whales, sea lions, dolphins, and walruses. It also offers other smaller projects including 3D movies, ferris wheels, and many others. The park officially opened on 20 January 2019 with an initial area of 68k square meters, and will expand to 232k square meters by 2019 year-end. Please refer to our MacVisit note on Haichang Ocean Park for more details.

Fig 27 Performance Show in Songcheng Sanya

Fig 28 Aquatic animal show in Sanya Haichang Fantasy Town


MICE could be an important ASP driver

Hainan is gaining more popular as a MICE destination partially due to its hosting the Bo’ao Forum of Asia (BFA). It has been improving its reception capacity for MICE customers, and from what we saw in Sanya Haitang Bay, the progress is noticeable. Atlantis alone has over 5,000 square meters of area for all types of MICE, with its biggest banquet room able to accommodate up to 1,500 attendees. A chain of high-end hotels (Grand Hyatt, Shangri-La, Sheraton, Mangrove, etc.) along the Haitang Bay could provide sufficient space for MICE.

MICE customers usually have higher per-capita consumption than traditional tourists, which could benefit Hainan’s tourism revenue. In the case of Haitang Bay, as Sanya DFS is also located there, the growing number of MICE customers could help boost duty-free ASP for the store.

Gambling is likely to be restricted within a few activities

In terms of gambling relaxation, what we heard is that a large-scale relaxation is almost impossible, as the Chinese government’s stance is against gambling. For the time being, only the horse racing and sports/international competition lottery were mentioned in the Implementation Plan, and these activities are likely to be implemented step-by-step with prudent design.

28 January 2019 19


EQUITIES

601888 CH Outperform Price (at 08:50, 25 Jan 2019 GMT) Rmb59.11

Valuation Rmb 71.40 - PER 12-month target Rmb 71.40 Upside/Downside % +20.8 12-month TSR % +21.9 Volatility Index Medium GICS sector Consumer Services Market cap Rmbm 115,411 Market cap US$m 16,094 Free float % 37 30-day avg turnover US$m 60.9 Number shares on issue m 1,952

Investment fundamentals Year end 31 Dec 2017A 2018E 2019E 2020E

Revenue m 28,282 47,013 55,510 61,762 EBIT m 3,482 5,404 6,460 7,824 EBIT growth % 39.6 55.2 19.6 21.1 Reported profit m 2,531 3,148 4,337 4,630 Adjusted profit m 2,527 3,194 4,352 4,645 EPS rep Rmb 1.30 1.61 2.22 2.37 EPS rep growth % 40.0 24.4 37.8 6.7 EPS adj Rmb 1.29 1.64 2.23 2.38 EPS adj growth % 33.4 26.4 36.3 6.7 PER rep x 45.6 36.7 26.6 24.9 PER adj x 45.7 36.1 26.5 24.8 Total DPS Rmb 0.52 0.52 0.65 0.89 Total div yield % 0.9 0.9 1.1 1.5 ROA % 18.2 23.1 22.6 23.0 ROE % 19.0 21.1 24.6 22.4 EV/EBITDA x 27.0 18.3 15.3 12.7 Net debt/equity % -75.1 -71.9 -78.6 -79.1 P/BV x 8.2 7.1 6.0 5.2

Source: FactSet, Macquarie Research, January 2019 (all figures in Rmb unless noted, TP in CNY)

Analysts




China Int'l Travel Service (A-Share) (601888 CH) Beneficiary of Hainan policy relaxation

Key points Hainan duty free quota relaxation (from December 2018) should build

momentum. Potential margin upside from easing subsidies and stronger bargaining

power. More projects in the pipeline.

We cut our NP forecasts by 11%/6.4%/16.3% for FY18/19/20E mainly due to higher operating expenses.

Event We hosted a Hainan consumer tour and visited CITS’ Sanya duty free mall (Sanya

DFS). We witnessed strong traffic there; we believe the mall is benefiting from policy relaxation. We cut our NP forecasts by 11%/6.4%/16.3% for FY18/19/20E mainly due to higher rental, salary, and advertisement expenses. Our TP remains unchanged at RMB 71.40/sh and is based on a 30x FY20E PER as we roll forward our valuation base. We believe the company can buck the trend of weakening consumption given favourable policy relaxation. Reiterate Outperform.

Impact Hainan duty free quota relaxation from December 2018 should build

momentum for Sanya DFS. The Chinese government relaxed Hainan’s annual duty-free consumption quota from Rmb16,000/person to Rmb30,000/ person, with no limit on purchase frequency (link), effective 1 December 2018. We note that Sanya DFS witnessed a strong sales pick-up in December from both local residents and tourists. Meanwhile, we believe there is still upside for revenue growth given that the company might further increase its cosmetics & perfume operating area, which accounts for >50% of revenue and has delivered the strongest growth thus far. Approximately 30% of the operating space is still used for F&B and tax-paid shopping, which can be released for duty-free shopping in the future. We still see the room for brand mix upgrades as some key brands under LVMH have not built up exposure yet. Lastly, the extension project EscapeLand is under construction and slated for F&B. We believe this could enrich the shopping experience and encourage consumers to stay longer.

Potential margin upside from easing subsidies and stronger bargaining power. Customers need to pay parcel tax for items with a unit price over Rmb8,000, and use their remaining duty-free quota to deduct the tax base. According to our checks, Sanya DFS reimburses parcel tax for bags, suitcases, and apparel products. Under these circumstances, CITS would have tax savings post a 5% parcel tax cut in November 2018 and the quota raise in December 2018. The company has become a supplier to all four DFS in Hainan, and should enjoy stronger bargaining power with growing purchase scale.

More projects in the pipeline. Haikou downtown DFS opened Phase I on 19 January 2019, and the total revenue scale could be very similar to Sanya DFS once both phase I/II commence. CITS recently acquired a big parcel of land in Haikou and this will be used for its flagship duty free mall with full-fledged shopping services. Apparently, the government’s mission is to promote Hainan as an offshore duty free shopping destination and CITS should be a major beneficiary.

Earnings and target price revision We cut our NP forecast by 11%/6.4%/16.3% for FY18/19/20E. Our TP remains

unchanged at RMB 71.40/sh based on a 30x FY20E PER.





http://gss.mof.gov.cn/zhengwuxinxi/zhengcefabu/201811/t20181128_3077844.html


28 January 2019 20

Inside

TP remains at Rmb71.40 21

Policy relaxation a big stimulus to duty free

sales 22

GPM still has upside 25

Don’t underestimate the growth sustainability

– more projects in the pipeline 26

China Int'l Travel Service (A-Share) (601888 CH) Company profile

CITS is principally engaged in the commodities retail business, which involvesthe operation of regular chain stores, dealing with tax-free commodities andtaxed commodities; as well as tourism services, which involves the operationof travel agencies, providing domestic travel services, inbound travel services,outbound travel services, ticket agent services and other services.

Fig 1 Duty-free store (DFS) locations in Hainan


Fig 2 601888 CH rel HSI performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2019 (all figures in Rmb unless noted, TP in CNY)


28 January 2019 21

TP remains at Rmb71.40 We cut our NP forecast by 11%/6.4%/16.3% for 2018/2019/2020E to factor in 2018 preliminary earnings, travel agency disposal gains in 2019, and the latest duty-free sales trends. Our target price remains RMB71.40/sh as we roll over our valuation base to 2020E. We believe the company can buck the trend of weakening consumption due to favourable policy relaxation. Our new TP is based on 30x 2020E PER.

Fig 3 CITS’s historical PER bands Fig 4 CITS’s historical PBR bands

Source: Bloomberg, Macquarie Research, January 2019 Source: Bloomberg, Macquarie Research, January 2019

Earnings revision

We cut our NP forecast by 11%/6.4%/16.3% for FY18/19/20E. Our new earnings forecasts are based on the following assumptions:

Revenue: We raise our revenue forecast by 1.2%/1.3%/1.4% for FY18/19/20E respectively, as we factor in higher-than-expected duty-free sales in Sanya DFS after a quota raise.

OP margin: We lower our OPM by 1.3ppt/2.6ppt/2.6ppt for FY18/19/20E to factor in higher SG&A expense from rental cost with new DFS contracts, remuneration expense and advertising expense.

Net margin: We lower our NPM by 0.9ppt/0.6ppt/1.6ppt for FY18/19/20E. For FY19, the travel agency disposal gain partially offsets higher operating expenses.

Fig 5 Earnings revision (Rmb mn) Old Old Old New New New % chg. % chg. % chg. FY18 FY19 FY20 FY18 FY19 FY20 FY18 FY19 FY20

Revenue 46,447.6 54,813.5 60,902.3 47,012.5 55,510.3 61,762.3 1.2% 1.3% 1.4% Gross Profit 19,322.9 23,646.3 26,603.2 19,297.8 23,591.7 26,596.2 (0.1%) (0.2%) (0.0%) Operating Profit 5,936.9 7,822.9 9,304.9 5,403.6 6,460.3 7,824.2 (9.0%) (17.4%) (15.9%) Pre-Tax 5,967.3 8,102.4 9,666.7 5,390.2 7,605.1 8,155.8 (9.7%) (6.1%) (15.6%) Net Income 3,536.4 4,635.5 5,529.0 3,147.8 4,337.4 4,629.6 (11.0%) (6.4%) (16.3%) Margin (%) Gross Margin 41.6% 43.1% 43.7% 41.0% 42.5% 43.1% -0.6ppt -0.6ppt -0.6ppt OP Margin 12.8% 14.3% 15.3% 11.5% 11.6% 12.7% -1.3ppt -2.6ppt -2.6ppt Net Margin 7.6% 8.5% 9.1% 6.7% 7.8% 7.5% -0.9ppt -0.6ppt -1.6ppt Source: Company data, Macquarie Research, January 2019

0

20

40

60

80

100

120

11 12 13 14 15 16 17 18 19 20

40x

30x

18x

35x

25x

0

10

20

30

40

50

60

70

80

90

100

11 12 13 14 15 16 17 18 19 20

6x

7.5x

3x

5x

1.4x


28 January 2019 22

Policy relaxation a big stimulus to duty free sales The latest round of duty-free quota raise became effective from 1 December 2018. Looking at historical relaxation cases and our recent trip to Hainan, we believe this quota raise effectively stimulated CITS Sanya DFS sales in December 2018. Meanwhile, new projects and brand mix upgrade could be future drivers for further growth.

As stated in the duty-free policy below, all tourists over the age of 16 who are leaving Hainan for domestic destinations by air, train or ship are eligible for duty-free purchases. With the inclusion of ship transportation from 28 December 2018, the offshore duty-free policy now covers all transportation methods.

Fig 6 Offshore duty-free policy displayed in Sanya DFS

Source: Macquarie Research, January 2019

Personal quota raise helps sales growth

During our recent trip, we noted that Sanya DFS witnessed a strong sales pick-up in December 2018 from both local residents and tourists. According to historical track records, policy relaxation has helped boost duty-free sales growth. Following the first quota lift in November 2012, sales jumped in the beginning of 2013 with significant growth in February (+122% YoY). In February 2016, despite a high comparison base, sales recorded +18% YoY growth, which could also be partially attributable to policy relaxation.


28 January 2019 23

Fig 7 Hainan duty-free sales growth and policy changes

Source: Wind, Ministry of Commerce, Macquarie Research, January 2019

Category/brand mix upgrade could further drive sales growth

Approximately 30% of the store’s operating space is still used for F&B and tax-paid shopping. We believe this space can be turned into a duty-free area in the future, given that the new F&B extension project is under construction.

Cosmetics & perfume currently account for >50% of revenue, and management do not rule out the option to further expand the cosmetics counters. Estee Lauder is the largest cosmetics brand by total sales, while Whoo and SK-II are the best performers among Korea/Japanese brands. We still see room for brand mix upgrade as some key brands under LVMH have not built up exposure yet.

New F&B facility could encourage consumers to stay longer

Currently the only F&B area in Sanya DFS is a food court located at the third floor, with very limited food choices. The extension project EscapeLand started construction in 2017 and is slated for F&B services, which is positioned as a major ancillary facility for Sanya DFS. We believe it can enrich the shopping experience and encourage consumers to stay longer.

As shown in Fig 10, EscapeLand sits right next to Sanya DFS, with a narrow waterway in between. As disclosed by CITS’ 2018 interim report, the project has already entered the decoration process. In November 2018, the Hainan government also released the bid result for the construction of bridges connecting EscapeLand with Sanya DFS, with an expected construction period of one year.

Nov 1, 2012: Quota lifted from Rmb5k/person/visit to Rmb8k/person/visit

Feb 1, 2016: For non-Hainan residents, quota changed to Rmb16k/person/year with no purchase frequency limit, compared to Rmb8k/person/visit with up to 2 purchases each year

Dec 1, 2018: Quota lifted to Rmb30k/person/year with no purchase frequency limit for both Hainan and non-Hainan residents

Rmb mn

http://zw.hainan.gov.cn/data/jydt/2018/11/47667/


28 January 2019 24

Fig 8 Food court is the only F&B area in Sanya DFS Fig 9 Model of EscapeLand


Fig 10 Location of EscapeLand



28 January 2019 25

GPM still has upside Long-term benchmark market leader

We still believe the company could still see upside to its GPM as it is still below peers such as Dufry’s. Dufry is a Swiss-based travel retailer and the world’s largest duty-free operator. In 1H18, Dufry recorded a GPM of 60% while CITS’ duty-free business GPM was 52%. CITS’ duty-free business GPM stayed relatively stable at ~45-46% during 2012-17, and jumped to 52% in 1H18, which was attributable to economies of scale from the consolidation of Sunrise Shanghai and a product mix change in Sanya DFS. In the long term, Dufry’s GPM could be a reasonable target for CITS’ duty-free business, in our view.

Fig 11 Gross profit margin: Dufry vs. CITS duty-free business

Source: Wind, Bloomberg, Macquarie Research, January 2019

Less subsidies to consumers

The new parcel tax rate has become effective from 1 November 2018, with the three tax brackets now 15%, 25%, 50% from the previous 15%, 30%, 60%. As Sanya DFS reimburses the parcel tax for bags, suitcases, and apparel products (under the “Textile and apparel” category), it could enjoy tax subsidy savings from the 5% tax cut. Another indirect positive comes from the quota raise. As unused duty-free quota is deducted from the tax base for parcel tax payments (up to am Rmb8,000 deduction for each item), a higher quota could mean more reserve for tax base deduction, which could also save tax subsidy expense for the DFS.

Fig 12 Parcel tax cut from 1 November 2018

High-grade cosmetics Luxury jewellery Luxury watches

Textile and apparel

Sports products F&B

Gold and silver products

Before 1 Nov 2018 60% 60% 60% 30% 30% 15% 15% After 1 Nov 2018 50% 50% 50% 25% 25% 15% 15% Source: Ministry of Finance, Macquarie Research, January 2019

60%

52%

35%

40%

45%

50%

55%

60%

2009

2010

2011

2012

2013

2014

2015

2016

2017

1H18

Dufry GPM CITS duty-free GPM


28 January 2019 26

Don’t underestimate the growth sustainability – more projects in the pipeline The government’s mission is to promote Hainan as an offshore duty free shopping destination and CITS should be the biggest beneficiary. Apart from Sanya DFS and Haikou Airport DFS (shown in red in Fig 14), the new Haikou downtown DFS and Bo’ao downtown DFS (shown in blue) have just started operation from 19 January 2019, while the Haikou flagship duty free shopping mall is in the planning stage.

Our site visit and meetings with DFS experts reassure our positive outlook for the duty-free business in Hainan, as the opening of new DFS, especially the Haikou downtown DFS, should make a strong contribution to total duty-free sales growth.

Fig 13 Summary of DFS in Hainan

DFS Location OFA (s.q.m.) Opening

from Operator

Sanya downtown DFS Sanya Haitang Bay 70,000 Sep-14 China Duty Free Group (CDFG, wholly-owned subsidiary of CITS) Haikou Airport DFS Haikou Meilan Airport 30,000 Dec-11 Haikou Meilan Airport Duty Free (51% owned by Hainan Duty Free) Haikou downtown DFS

Haikou downtown 13,000 (Phase 1) 22,000 (Total)

Jan-19 Hainan Duty Free (51% owned by CTS, controlling shareholder of CITS)

Bo'ao downtown DFS Bo'ao Forum for Asia venue 4,200 Jan-19 Hainan Duty Free (51% owned by CTS, controlling shareholder of CITS) Source: DFS representatives, CITS news, Macquarie Research, January 2019



Haikou downtown DFS

Haikou downtown DFS opened on 19 January 2019 with a total operating area of 22k sqms. Phase I with an operating area of 13k sqms is operating now and phase II will open later. Its operator is Hainan Duty Free Co., Ltd., but the sourcing is conducted by CDFG (China Duty Free Group), a wholly-owned subsidiary of CITS. The store is located inside a large shopping mall in downtown Haikou, and CDFG leased the location with mall operators on a three-year leasing contract.


28 January 2019 27

This store will contain luxury brands in the cosmetics, watches, jewellery, and leather goods categories. One DFS industry expert expected its total revenue scale could be very similar to Sanya DFS once both phase I/II commence.

Bo’ao downtown DFS

Bo’ao downtown DFS opened on 19 January 2019 as well, with a total operating area of 4,200 sqms. This store will cover international luxury brands as well.

Haikou flagship DFS

CITS recently acquired a big parcel of land in Haikou (link1, link2) and this will be used for its flagship duty free mall with full-fledges shopping services. It is a 40-minute driving distance from downtown Haikou. According to our industry checks, it will be a big shopping complex with duty free shopping and entertainment services.

Fig 15 New Haikou downtown duty free shop opened on 19 January 2019

Fig 16 New Bo’ao downtown duty free shop opened on 19 January 2019


CITS could consolidate the market through expected share injection

CITS recently announced (link) that its controlling shareholder CTS will inject 51% shares of Hainan Duty Free Co., Ltd. into CITS as soon as possible. Currently Hainan Duty Free operates the Haikou downtown DFS and Bo’ao DFS, and controls the operation of Haikou Meilan Airport DFS with a 51% shareholding in its operator. If the share injection proceeds, CITS will gain control over all four existing DFS in Hainan, thus consolidating the offshore duty-free market.


Source: Qichacha.com, Company filings, CITS news, Macquarie Research, January 2019

http://www.cninfo.com.cn/new/disclosure/detail?plate=sse&stockCode=601888&announcementId=1205674298&announcementTime=2018-12-18




28 January 2019 28

Macquarie Quant Alpha Model Views The Quant View page below has been derived from models that are developed and maintained by Sales and Trading personnel at Macquarie. The models are not a product of the Macquarie Research Department.

The quant model currently holds a reasonably positive view on China Int'l Travel Service (A-Share). The strongest style exposure is Profitability, indicating this stock is efficiently converting investments to earnings; proxied by ratios like ROE or ROA. The weakest style exposure is Valuations, indicating this stock is over-priced in the market relative to its peers.

Displays where the company’s ranked based on the fundamental consensus Price Target and Macquarie’s Quantitative Alpha model. Two rankings: Local market (China A) and Global sector (Consumer Services)

78/447 Global rank in

Consumer Services % of BUY recommendations 86% (19/22) Number of Price Target downgrades 1 Number of Price Target upgrades 2

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score (higher is better).

For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.2

0.1

0.3

0.7

1.7

1.7

2.0

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

Shanghai Jin Jiang Intl

Shanghai Jinjiang Intl

China CYTS Tours (A-Share…

China Int'l Travel Servic…


Huangshan Tourism Dev


-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%








Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.3

NaN

0.1

-0.2

1.1

0.2

-0.8

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0








-70% -50% -30% -10% 10% 30% 50% 70%








Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-32%

-30%

-25%

-23%

38%

42%

43%

44%

-60% -40% -20% 0% 20% 40% 60%

⇐ Negatives Positives ⇒

Volatility 250 Day

EPS Growth 5yr Historic

Operating Margin FY0

Working Capital Inc.

Dividend Yield FY0

Dividend Yield LTM

Dividend Yield NTM

Dividend Yield FY1

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

0.39 0.08

0.56-0.15

0.51 0.26

0.15 1.16 0.02

-0.72 0.70

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/447)

0 50 100

Percentile relative

to market(/3595)



28 January 2019 29

China Int'l Travel Service (A-Share) (601888 CH, Outperform, Target Price: Rmb71.40) Interim Results 1H/18A 2H/18E 1H/19E 2H/19E Profit & Loss 2017A 2018E 2019E 2020E

Revenue m 21,085 25,928 26,269 29,241 Revenue m 28,282 47,013 55,510 61,762 Gross Profit m 8,691 10,607 11,265 12,327 Gross Profit m 8,434 19,298 23,592 26,596 Cost of Goods Sold m 12,394 15,321 15,004 16,915 Cost of Goods Sold m 19,848 27,715 31,919 35,166 EBITDA m 3,052 2,460 3,714 2,882 EBITDA m 3,587 5,513 6,596 7,990 Depreciation m 54 54 68 68 Depreciation m 105 109 136 166 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 0 0 0 0 Other Amortisation m 0 0 0 0 EBIT m 2,998 2,406 3,646 2,814 EBIT m 3,482 5,404 6,460 7,824 Net Interest Income m 141 134 176 176 Net Interest Income m 185 275 352 447 Associates m 40 47 38 48 Associates m 202 87 86 86 Exceptionals m -6 -40 -5 -10 Exceptionals m 4 -46 -15 -15 Forex Gains / Losses m 0 0 0 0 Forex Gains / Losses m 0 0 0 0 Other Pre-Tax Income m -111 -218 802 -80 Other Pre-Tax Income m -39 -329 722 -186 Pre-Tax Profit m 3,062 2,329 4,657 2,949 Pre-Tax Profit m 3,834 5,390 7,605 8,156 Tax Expense m -758 -592 -1,154 -750 Tax Expense m -900 -1,351 -1,903 -2,045 Net Profit m 2,303 1,736 3,503 2,199 Net Profit m 2,935 4,040 5,702 6,111 Minority Interests m -384 -508 -771 -594 Minority Interests m -404 -892 -1,364 -1,482

Reported Earnings m 1,919 1,229 2,732 1,605 Reported Earnings m 2,531 3,148 4,337 4,630 Adjusted Earnings m 1,925 1,269 2,737 1,615 Adjusted Earnings m 2,527 3,194 4,352 4,645

EPS (rep) 0.98 0.63 1.40 0.82 EPS (rep) 1.30 1.61 2.22 2.37 EPS (adj) 0.99 0.65 1.40 0.83 EPS (adj) 1.29 1.64 2.23 2.38 EPS Growth yoy (adj) % 48.0 3.5 42.2 27.3 EPS Growth (adj) % 33.4 26.4 36.3 6.7

PE (rep) x 45.6 36.7 26.6 24.9 PE (adj) x 45.7 36.1 26.5 24.8

EBITDA Margin % 14.5 9.5 14.1 9.9 Total DPS 0.52 0.52 0.65 0.89 EBIT Margin % 14.2 9.3 13.9 9.6 Total Div Yield % 0.9 0.9 1.1 1.5 Earnings Split % 60.3 39.7 62.9 37.1 Basic Shares Outstanding m 1,952 1,952 1,952 1,952 Revenue Growth % 67.8 65.0 24.6 12.8 Diluted Shares Outstanding m 1,952 1,952 1,952 1,952 EBIT Growth % 68.0 41.7 21.6 17.0

Profit and Loss Ratios 2017A 2018E 2019E 2020E Cashflow Analysis 2017A 2018E 2019E 2020E

Revenue Growth % 26.3 66.2 18.1 11.3 EBITDA m 3,587 5,513 6,596 7,990 EBITDA Growth % 38.0 53.7 19.7 21.1 Tax Paid m 0 0 0 0 EBIT Growth % 39.6 55.2 19.6 21.1 Chgs in Working Cap m 886 -875 -230 -282 Gross Profit Margin % 29.8 41.0 42.5 43.1 Net Interest Paid m 76 5 0 0 EBITDA Margin % 12.7 11.7 11.9 12.9 Other m -1,532 -1,405 -1,678 -1,744 EBIT Margin % 12.3 11.5 11.6 12.7 Operating Cashflow m 3,017 3,238 4,688 5,964 Net Profit Margin % 8.9 6.8 7.8 7.5 Acquisitions m 0 0 0 0 Payout Ratio % 40.2 31.8 29.0 37.5 Capex m -294 -489 -577 -642 EV/EBITDA x 27.0 18.3 15.3 12.7 Asset Sales m 0 0 0 0 EV/EBIT x 27.8 18.7 15.6 13.0 Other m 1,748 2 1,840 0

Investing Cashflow m 1,454 -487 1,263 -642 Balance Sheet Ratios Dividend (Ordinary) m -1,876 -1,015 -1,263 -1,740 ROE % 19.0 21.1 24.6 22.4 Equity Raised m 0 0 0 0 ROA % 18.2 23.1 22.6 23.0 Debt Movements m -30 -102 0 0 ROIC % 57.5 108.5 95.5 121.6 Other m 9 -49 0 0 Net Debt/Equity % -75.1 -71.9 -78.6 -79.1 Financing Cashflow m -1,896 -1,167 -1,263 -1,740 Interest Cover x nmf nmf nmf nmf Price/Book x 8.2 7.1 6.0 5.2 Net Chg in Cash/Debt m 2,523 1,588 4,689 3,582 Book Value per Share 7.2 8.3 9.9 11.3

Free Cashflow m 2,723 2,749 4,111 5,322 Balance Sheet 2017A 2018E 2019E 2020E Cash m 11,382 12,970 17,658 21,241 Receivables m 1,576 2,518 3,057 3,320 Inventories m 3,218 3,786 4,995 4,883 Investments m 0 0 0 0 Fixed Assets m 1,426 1,778 1,241 1,689 Intangibles m 2 2 2 2 Other Assets m 3,329 4,709 4,464 5,377 Total Assets m 20,932 25,763 31,417 36,512 Payables m 3,260 4,039 4,841 5,078 Short Term Debt m 102 0 0 0 Long Term Debt m 0 0 0 0 Provisions m 0 0 0 0 Other Liabilities m 2,559 3,684 4,096 4,584 Total Liabilities m 5,921 7,723 8,937 9,661 Shareholders' Funds m 14,130 16,267 19,342 22,231 Minority Interests m 978 1,870 3,234 4,716 Other m -97 -97 -97 -97 Total S/H Equity m 15,011 18,041 22,480 26,851 Total Liab & S/H Funds m 20,932 25,763 31,417 36,512

All figures in Rmb unless noted. Source: Company data, Macquarie Research, January 2019

28 January 2019 30

28 January 2019 Hong Kong

EQUITIES

6808 HK Outperform Price (at 08:50, 25 Jan 2019 GMT) HK$7.93

Valuation HK$ 11.30 - EV/EBITDA 12-month target HK$ 11.30 Upside/Downside % +42.5 12-month TSR % +44.4 Volatility Index Medium GICS sector Food & Staples

Retailing Market cap HK$m 75,650 Market cap US$m 9,642 Free float % 23 30-day avg turnover US$m 7.6 Number shares on issue m 9,540 Investment fundamentals

Year end 31 Dec 2017A 2018E 2019E 2020E

Revenue bn 102.3 102.0 105.5 113.8 EBIT bn 4.5 4.1 4.6 5.2 EBIT growth % 14.0 -7.9 10.7 13.0 Reported profit bn 2.8 2.7 3.0 3.4 Adjusted profit bn 2.8 2.7 3.0 3.4 EPS rep Rmb 0.29 0.28 0.31 0.36 EPS rep growth % 8.6 -3.1 10.9 13.1 EPS adj Rmb 0.29 0.28 0.32 0.36 EPS adj growth % 8.7 -2.9 10.8 13.0 PER rep x 23.5 24.2 21.8 19.3 PER adj x 23.4 24.1 21.8 19.3 Total DPS Rmb 0.13 0.11 0.13 0.13 Total div yield % 1.9 1.7 1.8 1.8 ROA % 7.5 6.8 7.1 7.6 ROE % 12.7 11.7 12.0 12.4 EV/EBITDA x 6.9 7.3 6.7 6.2 Net debt/equity % -44.0 -45.9 -52.6 -61.0 P/BV x 2.9 2.7 2.5 2.3

6808 HK rel HSI performance, & rec history

Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, January 2019 (all figures in Rmb unless noted, TP in HKD)

Analysts



Cici Yu +86 21 2412 9078 [email protected]


Sun Art Retail Group (6808 HK) Hema Fresh ramping up

Key points Sun Art operates Hema Fresh in Hainan and North Eastern China. SSSg got hit by non-foods categories. Auchan’s consolidation provides the ammunition for new retail expansion.

Conclusion We visited a Hema Fresh store in Haikou, Hainan, which is operated by Sun

Art Retail. We continue to believe the new retail model can work, even though weak discretionary consumption demand caused the disappointing same store sales performance. We lower our net profit forecast by factoring in weak SSSg and possible fixed assets impairment loss. As Auchan cost savings could help offset the weak top line and O2O expense, we maintain our Outperform rating with a slightly lower TP of HK$11.30 based on 9.1x FY19E EV/EBITDA, in line with Bloomberg consensus average for global peers.

Impact Sun Art operates Hema Fresh in Hainan and North Eastern China.

According to the latest announcement, Sun Art and Hema Fresh have reached a cooperation agreement in Hainan and North Eastern China, which means Sun Art can open and operate Hema Fresh in these regions. The company opened the first Hema Fresh store in Sep 2018 in Haikou, Hainan. Based on our channel check during this Hainan tour, the end result looks satisfactory, with 50% online daily orders, and the store efficiency is 4-5x of Sun Art offline stores according to management. The company aims to open 10 Hema Fresh stores in 2019.

SSSg hit by non-foods categories. We believe Sun Art’s 4Q18 SSSg is very disappointing given that demand was lacklustre in non-foods categories such as home appliances and textiles. On the other hand, food-related goods, accounting for 65% of revenue, still recorded positive growth. We believe January SSSg will perform well due to the early CNY benefit, but it could be better to combine January + February numbers. In our view, the company is still in the store format transition and it might take time to bear fruit. However, we still believe the new retail format can work due to its convenience and BABA’s backup.

Auchan’s consolidation provides the ammunition for new retail expansion. Sun Art might book the one-off fixed assets impairment loss in 2018, and we roughly factor in a Rmb150m loss. Going into 2019, we believe RT Mart’s consolidation with Auchan could further help drive up the margin expansion from procurement synergy and opex savings. The incremental profit growth from offline could provide the ammunition for new retail roll out.

Earnings and target price revision We trim our FY18/19 NP forecast by 5% and 1%, respectively, and lower TP to

HK$11.30 from HK$11.60.

Price catalyst 12-month price target: HK$11.30 based on a EV/EBITDA methodology.

Catalyst: FY18 result.

Action and recommendation Maintain Outperform.







http://www3.hkexnews.hk/listedco/listconews/SEHK/2019/0116/LTN20190116003.pdf


28 January 2019 31

Investment thesis: Maintain Outperform; lower TP to HK$11.30/sh

Post our visit to Hema Fresh in Haikou, we still have faith in the new retail model as we saw the Haikou Hema Fresh’s efficiency is 4-5x of Sun Art offline stores. Sun Art has continued to be a leading player in China’s grocery retailing market and has been actively developing its own e-commerce platform. In light of Alibaba Group Holding (BABA US, US$152.03, Outperform, TP: US$220.00) becoming the second largest shareholder, we are positive on the meaningful collaboration between the two parties in the days to come and believe O2O growth will accelerate in the grocery retailing industry.

To factor in weak SSSg and possible fixed assets impairment loss, we trim our target price from HK$11.60/sh to HK$11.30/sh based on 9.1x FY19E EV/EBITDA, in line with in line with Bloomberg consensus average for global peers.

Fig 1 Historical PER bands

Fig 2 Historical EV/EBITDA bands

Source: Bloomberg, Macquarie Research, January 2019 Source: Bloomberg, Macquarie Research, January 2019

Earnings revision

We lower our 2018 and 2019 NP forecasts by 5% and 1%, respectively. We now estimate Sun Art’s net profit will decrease 3% while increase 11% YoY in 2018 and 2019. Our new earnings assumptions are based on the following:

SSSg: We lower our FY18/19 SSSg by 2%/4% to factor in weak SSSg performance.

Gross Margin: We maintain our FY18 GPM assumptions and slightly lift FY19’s GPM by 0.1ppt to 25.1%.

Operating margin: We trim our FY18 by 0.1ppt and lift FY19 OPM assumptions by 0.1ppt to 4.0% and 4.3%, respectively.

Fig 3 Earnings revisions (RMB m) Old Old New New % chg. % chg. 2018 2019 2018 2019 2018 2019

New store opening 26 26 26 26 0.0% 0.0% SSSg 0.2% 5.0% -1.8% 1.0% -2.0% -4.0% Revenue 103,865 109,411 102,036 105,463 -1.8% -3.6% Gross Profit 25,614 27,337 25,202 26,457 -1.6% -3.2% Operating Profit 4,331 4,620 4,131 4,573 -4.6% -1.0% Pre-Tax 4,311 4,600 4,111 4,553 -4.7% -1.0% Net Income 2,842 3,032 2,708 3,002 -4.7% -1.0% EPS (RMB) 0.30 0.32 0.28 0.31 -4.7% -1.0% Margin (%) Gross Margin 24.7% 25.0% 24.7% 25.1% 0.0% 0.1% OP Margin 4.2% 4.2% 4.0% 4.3% (0.1%) 0.1% Net Margin 2.7% 2.8% 2.7% 2.8% (0.1%) 0.1% Source: Macquarie Research, January 2019

3

5

7

9

11

13

15

12 13 14 15 16 17 18 19 20

35.0x

14.0x

26.0x

32.0x

21.0x

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

12 13 14 15 16 17 18 19 20

15.5x

7.5x

10x

13.5x

4.8x


28 January 2019 32

Macquarie Quant Alpha Model Views The Quant View page below has been derived from models that are developed and maintained by Sales and Trading personnel at Macquarie. The models are not a product of the Macquarie Research Department.

The quant model currently holds a reasonably positive view on Sun Art Retail Group. The strongest style exposure is Quality, indicating this stock is likely to have a superior and more stable underlying earnings stream. The weakest style exposure is Growth, indicating this stock has weak historic and/or forecast growth. Growth metrics focus on both top and bottom line items.

Displays where the company’s ranked based on the fundamental consensus Price Target and Macquarie’s Quantitative Alpha model. Two rankings: Local market (Hong Kong) and Global sector (Food & Staples Retailing)

62/172 Global rank in

Food & Staples Retailing % of BUY recommendations 54% (7/13) Number of Price Target downgrades 6 Number of Price Target upgrades 0

Macquarie Alpha Model ranking Factors driving the Alpha Model A list of comparable companies and their Macquarie Alpha model score (higher is better).

For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score.

Macquarie Earnings Sentiment Indicator Drivers of Stock Return The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below.

Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple.

What drove this Company in the last 5 years How it looks on the Alpha model Which factor score has had the greatest correlation with the company’s returns over the last 5 years.

A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market.

Source (all charts): FactSet, Thomson Reuters, and Macquarie Quant. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group ([email protected])

Fu

nd

am

en

tals

Quant

Local market rank Global sector rank

Attractive

-0.1

0.0

0.7

0.7

0.9

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0

China Resources Beer

Carrefour

Tesco

Sun Art Retail Group

Woolworths Group

-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100%


Carrefour

Tesco


Woolworths Group

Valuations Growth Profitability Earnings

Momentum

Price

Momentum

Quality

-0.3

-0.5

0.2

-0.4

-0.3

-3.0 -2.0 -1.0 0.0 1.0 2.0 3.0


Carrefour

Tesco


Woolworths Group

-30% -20% -10% 0% 10% 20% 30%


Carrefour

Tesco


Woolworths Group

Dividend Return Multiple Return Earnings Outlook 1Yr Total Return

-22%

-19%

-18%

-17%

37%

37%

37%

38%

-40% -20% 0% 20% 40%

⇐ Negatives Positives ⇒

Momentum 3 Month

Net Income Margin FY0

Return on Equity FY0

ROIC FY0

EV/EBITDA LTM

EV/EBITDA FY1

Dividend Yield LTM

EV/EBITDA (NTM)

0 1

Technicals & TradingRisk

LiquidityCapital & Funding

QualityPrice Momentum

Earnings MomentumProfitability

Growth

ValuationAlpha Model Score

-0.41 0.42

-1.53 0.11

1.68 0.11

-0.01-0.09-0.41

-0.20 0.70

0 1

Normalized

Score

0 50 100

Percentile relative

to sector(/172)

0 50 100

Percentile relative

to market(/559)



28 January 2019 33

Sun Art Retail Group (6808 HK, Outperform, Target Price: HK$11.30) Interim Results 1H/18A 2H/18E 1H/19E 2H/19E Profit & Loss 2017A 2018E 2019E 2020E

Revenue m 54,060 47,976 55,175 50,288 Revenue m 102,320 102,036 105,463 113,784 Gross Profit m 12,922 12,280 13,416 13,040 Gross Profit m 24,674 25,202 26,457 28,819 Cost of Goods Sold m 41,138 35,697 41,759 37,248 Cost of Goods Sold m 77,646 76,835 79,007 84,965 EBITDA m 4,288 3,021 4,479 3,482 EBITDA m 7,750 7,309 7,961 8,709 Depreciation m 1,482 1,482 1,610 1,610 Depreciation m 3,017 2,964 3,221 3,374 Amortisation of Goodwill m 0 0 0 0 Amortisation of Goodwill m 0 0 0 0 Other Amortisation m 107 107 84 84 Other Amortisation m 246 214 168 169 EBIT m 2,699 1,432 2,785 1,788 EBIT m 4,487 4,131 4,573 5,167 Net Interest Income m 0 0 0 0 Net Interest Income m 0 0 0 0 Associates m 0 0 0 0 Associates m 0 0 0 0 Exceptionals m -4 -4 -4 -4 Exceptionals m -5 -8 -8 -8 Forex Gains / Losses m -5 -7 -6 -6 Forex Gains / Losses m -13 -12 -12 -12 Other Pre-Tax Income m 0 0 0 0 Other Pre-Tax Income m 0 0 0 0 Pre-Tax Profit m 2,690 1,421 2,775 1,778 Pre-Tax Profit m 4,469 4,111 4,553 5,147 Tax Expense m -776 -392 -800 -491 Tax Expense m -1,449 -1,168 -1,291 -1,459 Net Profit m 1,914 1,029 1,974 1,287 Net Profit m 3,020 2,943 3,261 3,687 Minority Interests m -156 -79 -161 -99 Minority Interests m -227 -235 -260 -293

Reported Earnings m 1,758 950 1,813 1,188 Reported Earnings m 2,793 2,708 3,002 3,394 Adjusted Earnings m 1,762 954 1,817 1,192 Adjusted Earnings m 2,798 2,716 3,010 3,402

EPS (rep) fen 18.4 10.0 19.0 12.5 EPS (rep) fen 29.3 28.4 31.5 35.6 EPS (adj) fen 18.5 10.0 19.1 12.5 EPS (adj) fen 29.3 28.5 31.5 35.7 EPS Growth yoy (adj) % 0.2 -8.3 3.1 25.0 EPS Growth (adj) % 8.7 -2.9 10.8 13.0

PE (rep) x 23.5 24.2 21.8 19.3 PE (adj) x 23.4 24.1 21.8 19.3

EBITDA Margin % 7.9 6.3 8.1 6.9 Total DPS fen 13.0 11.4 12.6 12.6 EBIT Margin % 5.0 3.0 5.0 3.6 Total Div Yield % 1.9 1.7 1.8 1.8 Earnings Split % 64.9 35.1 60.4 39.6 Basic Shares Outstanding m 9,540 9,540 9,540 9,540 Revenue Growth % -0.0 -0.5 2.1 4.8 Diluted Shares Outstanding m 9,540 9,540 9,540 9,540 EBIT Growth % -7.7 -8.3 3.2 24.8

Profit and Loss Ratios 2017A 2018E 2019E 2020E Cashflow Analysis 2017A 2018E 2019E 2020E

Revenue Growth % 1.9 -0.3 3.4 7.9 EBITDA m 6,541 7,309 7,961 8,709 EBITDA Growth % 9.1 -5.7 8.9 9.4 Tax Paid m -2,938 -2,337 -2,583 -2,919 EBIT Growth % 14.0 -7.9 10.7 13.0 Chgs in Working Cap m 1,172 -10 132 929 Gross Profit Margin % 24.1 24.7 25.1 25.3 Net Interest Paid m 0 0 0 0 EBITDA Margin % 7.6 7.2 7.5 7.7 Other m 2,215 701 684 691 EBIT Margin % 4.4 4.0 4.3 4.5 Operating Cashflow m 6,990 5,663 6,194 7,410 Net Profit Margin % 2.7 2.7 2.9 3.0 Acquisitions m 0 0 0 0 Payout Ratio % 44.3 39.9 39.9 35.3 Capex m -2,509 -3,877 -2,953 -3,186 EV/EBITDA x 6.9 7.3 6.7 6.2 Asset Sales m 2 0 0 0 EV/EBIT x 12.0 13.0 11.7 10.4 Other m 252 466 567 729

Investing Cashflow m -2,255 -3,411 -2,386 -2,457 Balance Sheet Ratios Dividend (Ordinary) m -2,084 -1,214 -1,177 -1,304 ROE % 12.7 11.7 12.0 12.4 Equity Raised m 0 0 0 0 ROA % 7.5 6.8 7.1 7.6 Debt Movements m -23 0 0 0 ROIC % 20.6 22.4 23.6 27.7 Other m -366 394 424 467 Net Debt/Equity % -44.0 -45.9 -52.6 -61.0 Financing Cashflow m -2,473 -821 -753 -837 Interest Cover x nmf nmf nmf nmf Price/Book x 2.9 2.7 2.5 2.3 Net Chg in Cash/Debt m 2,262 1,431 3,056 4,116 Book Value per Share 2.3 2.5 2.8 3.0

Free Cashflow m 4,481 1,785 3,241 4,225 Balance Sheet 2017A 2018E 2019E 2020E Cash m 10,362 11,793 14,849 18,965 Receivables m 3,566 3,699 3,746 3,944 Inventories m 14,201 14,837 14,961 15,744 Investments m 0 0 0 0 Fixed Assets m 30,818 31,478 31,043 30,686 Intangibles m 177 209 241 273 Other Assets m 613 613 613 613 Total Assets m 59,737 62,631 65,453 70,224 Payables m 35,446 36,206 36,508 38,417 Short Term Debt m 2 2 2 2 Long Term Debt m 1 1 1 1 Provisions m 0 0 0 0 Other Liabilities m 739 739 739 739 Total Liabilities m 36,188 36,948 37,250 39,159 Shareholders' Funds m 22,315 24,104 26,235 28,662 Minority Interests m 1,234 1,580 1,969 2,403 Other m 0 0 0 0 Total S/H Equity m 23,549 25,683 28,204 31,065 Total Liab & S/H Funds m 59,737 62,631 65,453 70,224

All figures in Rmb unless noted. Source: Company data, Macquarie Research, January 2019

28 January 2019 34


EQUITIES

300144 CH Not rated Stock price as of 25/01/2019 RMB 19.81 GICS sector Hotels, Restaurants &

Leisure Market cap RMBm 28,035.3 Avg Value Traded (3m) RMBm 167.3 12m high/low RMB 27.85/17.65 PER FY17 x 26.2 P/BV FY 17 x 3.7

Historical financials

YE Dec (RMBm) 2015A 2016A 2017A

Revenue 1,695 2,644 3,024 % growth 81.2 56.0 14.4 EBITDA 1,009 1,365 1,579 % growth 62.7 35.2 15.7 EPS 45.62 62.22 73.54 % growth 74.6 43.1 18.3 EBIT Margin 48.9 43.9 44.9

Source: Company data, Bloomberg,January 2019

Share Price Driver

Thematic

Growth

Value

Event


Share price perf. vs CSI 300 Index

Source: Bloomberg, January 2019

Analysts




MacVisit: Songcheng Performance Development Leader in tourism performing arts

Key points Performing arts projects are going through fast expansion. Light asset business targets lower-tier cities. Live streaming business will no longer be consolidated from 2019.

Event

We visited Songcheng Performance and watched its “The Romantic Show of Sanya”. The company is going through an expansion period with several new project launches from 2H18 to 2020. Meanwhile, its first light asset project recorded strong performance in the first year of operation. The company’s leading position in China’s tourism performing arts sector remains solid.

Key findings

Performing arts projects are going through fast expansion. The company has several performance-based theme parks including Hangzhou Songcheng Park, Sanya Park, Lijiang Park, Jiuzhai Park (temporarily closed after an earthquake in August 2017), and Guilin Park, all of which are located in popular tourist destination cities. The company has 30 theatres and 65,000 seats, and its projects, in total, recorded annual visitation of over 33mn as of 30 June 2018. Following the opening of Guilin Park in July 2018, the company has entered a period of fast expansion. Its Xi’an project is expected to open in 1H19, followed by its Zhangjiajie project in mid-2019. Its Shanghai project and Australia project are scheduled to open by 2020.

Light asset business targets lower-tier cities. The company has signed four contracts for light asset business, i.e., providing design, personnel training, operation management, and branding services for parks owned by other parties. The two projects in Ningxiang (Hunan Province) and Yichun (Jiangxi Province) have already opened, with two other projects in the pipeline. The company charges a fixed service fee plus a commission fee based on the revenue generated by these projects. During the year after the Ningxiang project opened in July 2018, it received a total of over 4mn visitations and recorded revenue of Rmb160mn. Its performance show has been welcomed by visitors with over 1,000 sessions held during the operational year. The light asset projects mainly target lower-tier cities and have gained support from local governments, as they can create jobs and attract tourists.

Live streaming business will no longer be consolidated from 2019. As the company recently disclosed (link), its live streaming business, 6Rooms, is going through a reorganization with the operator of another live-streaming platform Huajiao. The company expects its share in 6Rooms will fall below 30% after the reorganization, and thus will no longer consolidate 6Rooms into financial statements from 2019.

Financials

In 3Q18, revenue rose 4.1% YoY to Rmb 960mn, while net profit grew 22.3% YoY to Rmb 482mn.

GPM improved 4.1% YoY to 73.8% in 3Q18.

200025003000350040004500500055006000

0

20

40

60

80

100

120

300144 CH [LHS] CSI 300 Index [RHS]





http://www.cninfo.com.cn/cninfo-new/disclosure/szse_gem/bulletin_detail/true/1205700847?announceTime=2018-12-29


28 January 2019 35

Ownership

History and corporate governance

Major shareholders as of 30 Sept 2018:

Hangzhou Songcheng Group Co Ltd owns 29.48%.

Huang Qiaoling owns 15.05%.

Hangzhou Songcheng Park opened in 1996, and the Romantic Show of Songcheng began performance in 1997.

Hangzhou Amusement Park opened in 2007.

The company was listed on Shen Zhen Stock Exchange on 9 December 2010.

Sanya Songcheng Park opened in 2013.

Lijiang Songcheng Park and Jiuzhai Songcheng Park opened in 2014.

Balance sheet data and refinancing (as of 30 September 2018)

Management and Directors background

Cash and cash equivalents of Rmb1,904m

Property, plant and equipment of Rmb2,067m

Interest-bearing borrowings of nil

Total assets of Rmb9,906m

Mr. Huang Qiaoling, aged 60, is Chairman of the Board. He is the founder of the company.

Mr. Huang Qianlong, aged 58, is a Director of the Board. Mr. Huang is an economist.

Ms. Zhang Xian, aged 44, is a Director of the Board, and Chief Executive Officer of the company. She has over 18 years working experience with the company.

Latest results highlights (3Q18)

Latest results highlights (1H18)

Revenue grew 4.1% YoY to Rmb 960m.

Gross profit grew 10.2% YoY to Rmb 708m.

Net profit grew 22.3% YoY to Rmb 482m.

Revenue from Hangzhou Songcheng Park grew 5.1% YoY to Rmb 384m.

Revenue from Sanya Songcheng Park grew 24.3% YoY to Rmb 234m.

Revenue from digital entertainment platforms grew 5.4% YoY to Rmb 620m.

Fig 1 Revenue breakdown by business category Fig 2 Segment gross profit margins

Source: Wind, Company data, January 2019 Source: Wind, Company data, January 2019

91.8%

71.4%

49.7% 47.3%

21.8%

41.2%41.0%

3.0% 3.6% 6.9% 9.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017

Performance shows Digital entertainment platforms

Travel services Other business

67.2%65.7%

61.7%63.2%

67.9%68.8%70.2%

72.6%

66.7%

51.3%50.0%

51.1%

55.9%

63.8%

59.9%58.0% 57.9%

38.0%

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

80%

2014 2015 2016 2017 1H18

Overall GPM

Performance shows GPM

Digital entertainment platforms GPM

Travel services GPM


28 January 2019 36

Fig 3 Net profit margin Fig 4 Annual visitation to offline projects


Fig 5 No. of signed live streaming hosts on 6Rooms Fig 6 Monthly Active Users on 6Rooms


39.0%38.1%

34.7%35.4%

43.7%

30%

32%

34%

36%

38%

40%

42%

44%

46%

48%

50%

2014 2015 2016 2017 1H18

NPM

14.6

22.3

30.0

33.0

0

5

10

15

20

25

30

35

40

2014 2015 2016 2017

Annual visitation to offline projects (mn)

80

220

290

0

50

100

150

200

250

300

2015 2016 2017

No. of signed live streaming hosts on 6Rooms (‘000)

30

43.5

56

0

10

20

30

40

50

60

2015 2016 2017

Monthly Active Users on 6Rooms (mn)


28 January 2019 37

Songcheng Performance Development (300144 CH, not rated)Interim Results 2H16A 1H17A 2H17A 1H18A Annual Results 2014A 2015A 2016A 2017A

Revenue m 1,458 1,393 1,631 1,511 Revenue m 935 1,695 2,644 3,024 Gross profit m 871 886 1,025 1,026 Gross profit m 628 1,112 1,630 1,911 Cost of goods sold m 587 506 607 485 Cost of goods sold m 307 582 1,014 1,113 EBITDA m 687 749 830 900 EBITDA m 621 1,009 1,365 1,579 Depreciation m 78 77 83 79 Depreciation m 128 140 153 160 Amortisation 28 29 33 33 Amortisation 33 40 50 62 EBIT m 609 643 715 787 EBIT m 460 829 1,162 1,358 Net interest income m (8) (7) (4) 9 Net interest income m 12 (1) (13) (12) Forex gain/loss m 0 0 0 0 Forex gain/loss m 0 0 0 0Other pre-tax profit m -251 -4 -45 -1 Other pre-tax profit m 19 -3 12 -49Pre-Tax Profit m 611 632 665 795 Pre-Tax Profit m 491 825 1,160 1,297Tax expenses m (130) (105) (123) (136) Tax expenses m (127) (180) (243) (228) Net profit m 481 527 542 660 Net profit m 365 645 916 1,069Minority interest m 11 4 -2 -6 Minority interest m 4 15 14 2

Reported Earnings m 470 524 544 665 Reported Earnings m 361 631 902 1,068 Reported Earnings m 470 524 544 665 Reported Earnings m 361 631 902 1,068

EPS (rep) ₵ 32.4 36.1 37.5 45.8 EPS (rep) ₵ 64.8 45.6 62.2 73.5 EPS (adj) ₵ 32.4 36.1 37.5 45.8 EPS (adj) ₵ 64.8 45.6 62.2 73.5 EPS grow th yoy (adj) % 26.7 21.1 15.6 27.0 EPS grow th yoy (adj) % 16.9 74.6 43.1 18.3

PE (rep) x 29.8 42.3 31.0 26.2 PE (adj) x 29.8 42.3 31.0 26.2

EBITDA margin % 47.1 53.8 50.9 59.5EBIT margin % 41.8 46.2 43.8 52.1 Total DPS ₵ 15.0 7.0 10.0 12.0Revenue grow th % 30 17 12 9 Payout ratio % 23.2 15.3 16.1 16.3EBIT grow th % 24 16 17 22 Weighted average shares m 558 1,382 1,450 1,452

2014A 2015A 2016A 2017A Cash Flow Analysis 2014A 2015A 2016A 2017AProfit and Loss RatiosRevenue grow th % 37.8 81.2 56.0 14.4 Net income m 365 645 916 1,069 EBITDA grow th % 29.4 62.7 35.2 15.7 Depreciation & Amortisation m 161 180 203 221 EBIT Grow th % 25.6 80.4 40.1 16.9 Other non-cash adjustments m (4) (108) 221 (43) Gross profit margin % 67.2 65.6 61.6 63.2 Changes in non-cash capital m 6 198 (310) 516 EBITDA margin % 66.4 59.6 51.6 52.2 Operating cash flow m 528 915 1030 1764EBIT margin % 49.1 48.9 43.9 44.9 Acquisations m 0 0 0 1Net profit margin % 39.0 38.1 34.7 35.4 Capex m (464) (242) (698) (538) Payout ratio % 23.2 15.3 16.1 16.3 Asset sales m 0 118 11 18

Other m 119 (1,467) (539) (415) Balance Sheet Ratios Investing cash flow m (345) (1,591) (1,227) (935) ROE % 11.0 13.9 15.0 15.5 Dividends m (57) (95) (133) (167) ROA % 9.9 11.6 12.4 13.1 Equity raised m 0 0 0 0Net debt/equity x (29.0) (15.4) (9.2) (16.9) Debt movements m -30 600 -200 -200

Other m 19 633 60 -0Financing cash flow m (68) 1,138 (273) (367) Forex m - 0 -7 -8Net change in cash/debt m 115 462 (478) 455 Free cash flow m 64 674 332 1,226 Balance Sheet 2014A 2015A 2016A 2017A

Cash m 1,032 1,705 1,456 2,002 Receivables m 5 16 19 33 Inventories m 2 3 5 4 Investments m 0 0 170 99Fixed asset m 1,873 1,865 1,911 1,919 Intangible asset m 729 699 980 1,145 Other assets m 202 2,699 3,026 3,552 Total assets m 3,842 6,987 7,567 8,755 Payables m 309 629 519 527Short term debt m 0 0 0 0Long term debt m 0 600 400 0Other liabilities m 35 44 87 750 Total liablities m 344 1,273 1,006 1,277 Share capital m 558 1,453 1,453 1,453Surplus reserves m 124 161 198 257Undistributed profits m 1,015 1,525 2,289 3,152Other m 1,802 2,575 2,622 2,616Total S/H equity m 3,499 5,714 6,561 7,478 Total liab & S/H equity m 3,842 6,987 7,567 8,755

All f igures in CNY unless noted.Source: Company data, Wind, Bloomberg, January 2019

28 January 2019 38

28 January 2019 Hong Kong

EQUITIES

1992 HK Not rated Stock price as of 25/01/2019 HK$ 15.56 GICS sector Hotels, Restaurants &

Leisure Market cap HK$m 18,871.8 Avg Value Traded (3m) HK$m NA 12m high/low HK$ 16.28/12.68 PER FY17 x NA P/BV FY 17 x 3.6


YE Dec (RMB m) 2015A 2016A 2017A

Revenue 8,903 10,783 11,799 % growth NA 21.1 9.4 EBITDA 49 590 736 % growth NA 1100.2 24.8 EPS NA NA NA % growth NA NA NA EBIT Margin -3.7 0.1 0.4


Share Price Driver

Thematic

Growth

Value

Event


Share price perf vs Hang Seng Index


Analysts




MacVisit: Fosun Tourism Group Focusing on families

Key points The resort business is going asset-light. Atlantis targets premium and family-based customers. Building an all-inclusive tourism and leisure ecosystem.

Event We visited Fosun Tourism’s Atlantis Sanya complex and met with the

company’s management. The company operates a global chain of leisure resorts under the Club Med brand, while starting to build up tourism destinations, with Atlantis Sanya being its first project. The company’s products target families as the core customer base.

Key findings The resort business is going asset-light. Club Med operates 69 resorts

worldwide as of 30th June 2018, including 42 in EMEA, 12 in the Americas, and 15 in Asia Pacific. After the company acquired Club Med in Feb 2015, Club Med recorded a revenue CAGR of +15% for 2015-2017, while operating profit improved from Rmb -95mn in 2015 to Rmb464mn in 2017. Management believes that acquiring or cooperating with international brands could mitigate the high customer acquisition cost borne by Chinese brands. The company is increasing the percentage of resorts with an asset-light model, i.e., leasing or management contract model. Out of the 69 existing resorts, 43 operate on the leasing model and 9 on the management contract model. The company plans to open 12 new resorts by 2020, all of which will adopt the asset-light model.

Atlantis targets premium and family customers. Atlantis Sanya is a large tourism complex consisting of a hotel with 1,314 guest rooms, a waterpark, an aquarium, a theatre, and various F&B facilities. The project had its grand opening on 29th April 2018, and its occupancy rate increased from 42% in May to 73% in 3Q18. It mainly targets premium and family-based customers with room rates ranging from ~Rmb3,400 for a standard room to ~Rmb108,888 for an underwater suite (the room rate includes unlimited access to the waterpark and aquarium). Unlike neighbouring high-end hotels, Atlantis Sanya is more of an entertainment destination with accommodation services, according to management. The company is building two new tourism destination projects in Lijiang (a popular tourist city in southwestern China) and Taicang (30-min drive from Shanghai Hongqiao Airport).

Building an all-inclusive tourism and leisure ecosystem. The company wants to build an ecosystem to provide families with all-inclusive tourism solutions. Apart from resorts and tourism destinations, their entertainment and performance business ‘Fanxiu’ will launch the C-Show in Atlantis from Feb 5th for 2 shows per day. Its first Miniversity Club, a ‘learn and play’ club for children, has already opened in Atlantis. The company also provides tailor-made tourism and leisure products through its FOLIDAY platform.

Financials In 1H18, revenue grew 7.8% YoY to Rmb6,667m, while a net loss of

Rmb254.5m was recorded.

GPM expanded 1.1% YoY to 27.0% in 1H18.

20000

22000

24000

26000

28000

0

5

10

15

20

1992 HK [LHS] HSI index (RHS)






28 January 2019 39

Ownership History and corporate governance

Major shareholder:

Fosun International Holdings Ltd owns 82.32%

In 2009, Fosun International Group established the commercial business department with a focus on the tourism and commerce sectors.

In 2010, Fosun International Group made a minority investment in Club Med. Club Med opened Yabuli, the first Club Med resort in China.

In 2015, Fosun International Group acquired Club Med.

In 2016, Fosun Tourism Group was incorporated as an exempted company with limited liability in the Cayman Islands.

Atlantis Sanya had its soft opening in February 2018 and officially opened in April 2018. The company was listed on HKEX on 14 Dec 2018.

Balance sheet data and refinancing (as of 30 June 2018)




Interest-bearing borrowings of Rmb5,514m


Mr. Qian Jiannong, 56, is CEO, Chairman of the Board, and an Executive Director of the company. He is responsible for formulating business strategies and overall management. Mr Qian has over 20 years of experience in the tourism and retail industries.

Mr Henri Giscard d’Estaing, 62, is Deputy CEO, Vice Chairman of the Board, and President of Club Med. He is responsible for formulating development plans, business strategies and major corporate decisions of the Group and overseeing the overall management of Club Med.



Revenue grew 7.8% YoY to Rmb6,667m.

Gross profit grew 12.3% YoY to Rmb 1,798.5m.

Net loss was Rmb 254.5m for 1H18, as compared to a net loss of Rmb 149m for 1H17.

Revenue from resorts grew 3.1% YoY to Rmb 6,369m.

Revenue from tourism destinations grew 6035% YoY to Rmb 217m.

Revenue from services and solutions in various tourism and leisure settings grew 1142% YoY to Rmb 82m.

Fig 1 Revenue breakdown Fig 2 Resort business: customer breakdown

Source: Company filings, January 2019 Source: Company filings, January 2019

100.0% 100.0% 99.7%

95.5%

3.2%

1.2%

93%

94%

95%

96%

97%

98%

99%

100%

2015 2016 2017 1H18

Services and solutions in various tourism and leisure settings

Tourism Destinations

Resorts

82.1% 81.2% 79.9% 80.5%

17.9% 18.8% 20.1% 19.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 1H18

Individual customers Group customers


28 January 2019 40

Fig 3 Resort business: occupancy rate by category Fig 4 Resort business: average daily bed date by category


Fig 5 Resort business: occupancy rate by region Fig 6 Resort business: average daily bed date by region


60%

65%

70%

75%

80%

85%

2015 2016 2017 1H18

All Resorts Mountain Resorts Sun Resorts

500

1,000

1,500

2,000

2015 2016 2017 1H18

All Resorts Mountain Resorts Sun Resorts

Rmb

56%

58%

60%

62%

64%

66%

68%

70%

72%

74%

2015 2016 2017 1H18

All Resorts EMEA Americas Asia Pacific

500

1,000

1,500

2015 2016 2017 1H18

All Resorts EMEA Americas Asia Pacific

Rmb


28 January 2019 41

Fosun Tourism Group (1992 HK, Not rated) Interim Results 2H/16A 1H/17A 2H/17A 1H/18A Profit & Loss FY14A FY15A FY16A FY17A

Revenue m 6,185 5,615 6,667 Revenue m 8,903 10,783 11,799 Gross Profit m 1,601 1,229 1,799 Gross Profit m 2,068 2,541 2,830 Cost of Goods Sold m 4,583 4,386 4,869 Cost of Goods Sold m 6,835 8,242 8,969 EBITDA m 489 247 331 EBITDA m 49 590 736 Depreciation m 259 263 303 Depreciation m 315 495 522 Amortisation m 106 63 58 Amortisation m 60 84 169 EBIT m 124 -79 -30 EBIT m -326 11 45 Net Interest Income m -172 -92 -133 Net Interest Income m -310 -355 -264 Forex Gains / Losses m 1 -6 0 Forex Gains / Losses m -74 36 -5 Associates m 0 -18 0 Associates m 4 -11 -18 Other Pre-Tax Income m -78 -58 -23 Other Pre-Tax Income m -92 -126 -136 Pre-Tax Profit m -125 -253 -186 Pre-Tax Profit m -798 -445 -378 Tax Expense m -64 147 51 Tax Expense m -155 -27 83 Net Profit m (149) (47) (255) Net Profit m (631) (350) (197) Minority Interests m -40 -58 120 Minority Interests m -323 -122 -98

Reported Earnings m -149 -47 -255 Reported Earnings m -631 -350 -197 Adjusted Earnings m -173 -216 -270 Adjusted Earnings m -516 -393 -389

EPS (rep) ¢ -12.1 -3.9 -20.6 EPS (rep) ¢ NA NA NA EPS (adj) ¢ -14.0 -17.5 -21.9 EPS (adj) ¢ NA NA NA EPS Growth (adj) % NA NA 55.9 EPS Growth (adj) % NA NA NA PE (rep) x -26.0 -46.8 -83.3 PE (adj) x -31.7 -41.7 -42.1 EBITDA Margin % 7.9 4.4 5.0 Dividend m 0 0 0 EBIT Margin % 2.0 -1.4 -0.5 Total DPS ¢ 0.00 0.00 0.00 Earnings Split % 75.8 24.2 NA Total Div Yield % 0.0 0.0 0.0 Revenue Growth % NA NA 7.8 Basic Shares Outstanding m 1,233 1,233 1,233 EBIT Growth % NA NA -124.4 Diluted Shares Outstanding m 1,233 1,233 1,233

Profit and Loss Ratios FY14A FY15A FY16A FY17A Cashflow Analysis FY14A FY15A FY16A FY17A

Revenue Growth % NA 21.1 9.4 EBITDA m 49 590 736 EBITDA Growth % NA 1100.2 24.8 Tax paid m -149 -123 -283 EBIT Growth % NA NA 306.7 Chgs in Working Cap m 255 1,131 3,476 Gross Profit Margin % 23.2 23.6 24.0 Net Interest Paid m -179 -281 -337 EBITDA Margin % 0.6 5.5 6.2 Other m 141 -1 -264 EBIT Margin % -3.7 0.1 0.4 Operating Cashflow m 118 1,315 3,328 Net Profit Margin % -7.1 -3.2 -1.7 Acquisitions m -4,809 -5 -255 Payout Ratio % 0.0 0.0 0.0 Capex m -980 -1,670 -2,174 EV/EBITDA x 425.3 36.5 31.1 Asset Sales m 8 226 262 EV/EBIT x NA 1933.7 504.7 Other m 42 46 -89

Investing Cashflow m -5,739 -1,403 -2,257 Balance Sheet Ratios Dividend (Ordinary) m NA NA NA ROE % 77.4 -298.5 -6.9 Equity Raised m 416 0 0 ROA % -3.9 -1.9 -0.8 Debt Movements m 2,438 1,168 613 Net Debt/Equity % -669.2 442.4 142.6 Other m -642 -298 -2,059 Price/Book x NA 14.0 3.6 Financing Cashflow m 2,211 870 -1,446 FX Effect m -121 15 42 Net Chg in Cash m -3,530 798 -334 Free Cashflow m -862 -355 1,153

Balance Sheet FY14A FY15A FY16A FY17A Cash m 525 1,323 990 Receivables m 447 489 990 Inventories m 1,605 1,903 2,613 Fixed Assets m 7,450 8,877 11,031 Intangibles m 2,240 2,320 2,525 Other Assets m 4,049 4,721 11,181 Total Assets m 16,316 19,634 29,330 Payables m 7,398 6,025 9,336 Short Term Debt m 412 536 719 Long Term Debt m 4,635 5,945 6,756 Other Liabilities m 4,547 5,963 7,971 Total Liabilities m 16,991 18,469 24,782 Shareholders' Funds m 0 0 6,817 Minority Interests m 140 116 -70 Other m -815 1,050 -2,199 Total S/H Equity m -676 1,166 4,547 Total Liab & S/H Funds m 16,316 19,634 29,330

All figures in Rmb unless noted. Source: Bloomberg, Company data, January 2019

28 January 2019 42


EQUITIES

2255 HK Not rated Stock price as of 25/01/2019 HK$ 1.67 GICS sector Hotels, Restaurants &

Leisure Market cap HK$m 6,480 Avg Value Traded (3m) HK$m 2.0 12m high/low HK$ 2.30/1.18 PER FY17 x 20.1 P/BV FY 17 x 1.3


YE Dec (RMBm) 2015A 2016A 2017A

Revenue 1,417 1,650 1,680 % growth -7.5 16.4 1.8 EBITDA 801 726 732 % growth 13.1 -9.4 0.8 EPS 5.8 5.0 7.0 % growth 14.3 -12.9 39.2 EBIT Margin 42.4 32.7 32.9

Source: Corporate presentation, Bloomberg,January 2019

Share Price Driver

Thematic

Growth

Value

Event


Share price perf. vs Hang Seng Index


Analysts




MacVisit: Haichang Ocean Park Growth fuelled by new park openings

Key points Steady park revenue growth with an improving customer mix. Shanghai and Sanya parks are expected to double the company’s revenue

in 2019. Turning into more asset-light businesses.

Event

We visited Sanya Haichang Fantasy Town and met with Haichang Ocean Park’s management. The company is the largest ocean park operator in China with 10 parks in operation and over 66,000 marine/polar animal collection. Their new parks in Shanghai and Sanya are expected to fuel the revenue and profit growth in 2019.

Key findings

Steady park revenue growth with an improving customer mix. From 2014 to 2017, revenue from park operation recorded a CAGR of +11.7%, with attendance up in single-digit and ASP up as well. Non-ticket revenue recorded a CAGR of +26%, much higher than the +8% for ticket revenue, while the contribution of non-ticket revenue increased to 27% in 2017 from 19% in 2014. By channel, group tickets accounted for 53% of total ticket attendance in 2014, and this percentage dropped to 37% in 2017. Such customer mix change could contribute to higher ASP, as group visitors could enjoy a 30% discount.

Shanghai and Sanya parks are expected to double the company’s revenue in 2019. The Shanghai Park officially opened in Nov 2018. The location is a 30-40min drive away from Shanghai Disneyland, and management believe the two parks could create positive cluster effects. For Shanghai Park, management expect 4m visitors and an ASP of Rmb350 for 2019, which would amount to Rmb1.4bn for revenue. They expect its net profit could reach Rmb250m. The Sanya Park opened on 20th Jan 2019, and management aim at breaking even for 2019. They expect 2m customers with an ASP of Rmb160-200, amounting to a revenue of Rmb300-400m. Compared to a park operation revenue of Rmb1.6bn and a net profit of Rmb280m in 2017, the addition of Shanghai and Sanya parks could double the company’s revenue and net profit, according to management.

Turning into more asset-light businesses. As of 30th June 2018, the company’s net gearing ratio was 103%. Based on the company’s rich experience in theme park operation and animal conservation, they are now turning into more asset-light businesses, i.e., providing consultancy and management services including design, construction, operation, and branding. Such business generated Rmb53m revenue in 2017. Up until now, they have signed 40 contracts for around 20 projects, the total value of which amounts to Rmb380m.

Financials

In 1H18, revenue rose 2.4% YoY to Rmb659.3m, while net profit grew 49% YoY to Rmb82m.

GPM contracted 4.4% YoY to 45.4% in 1H18.

15000

20000

25000

30000

35000

0

0.5

1

1.5

2

2.5

2255 HK Equity HSI index [RHS]






28 January 2019 43

Ownership


Major shareholders at the end of 1H18:

BNP Paribas Singapore Trust Corporation Limited owns 42.10%, representing shares owned by Mr. Qu Naijie’s family trust.

ORIX (China) Investment Company Limited owns 9.83%

Hony Capital Fund V, L.P. owns 10.01%

Karst Peak Capital Limited owns 7.05%

Mr. Qu Naijie established Haichang Group Co in 1998.

In 2002, the company opened its first park, Dalian Laohutan Ocean Park.

In 2009, the company opened its first park in inland China, Chongqing Haichang Caribbean Water Park.

The company was listed on HKEX on 13 Mar 2014.

The Shanghai Haichang Ocean Park officially opened in Nov 2018.

Balance sheet data and refinancing (As of 30 June 2018)




Interest-bearing borrowings of Rmb6,243m


Mr. Qu Naijie, 57, is the founder of the Group, Chairman of the Board and the controlling shareholder of the Company. He is primarily responsible for the overall strategic planning, the general corporate, financial and compliance affairs of the Group. He has over 20 years of experience in corporation management and operations.

Mr Wang Xuguang, 49, is CEO and Executive Director, primarily responsible for the overall management of the Group. He has over 16 years of experience in the banking sector.



Revenue grew 2.4% YoY to Rmb659m.

Gross profit dropped 6.6% YoY to Rmb299m.

Net profit attributable to owners of the parent grew 49% to Rmb82m.

Revenue from park operations grew 5.8% YoY to Rmb615m.

Ticket revenue grew 7.4% YoY to Rmb446m.

Non-ticket revenue grew 1.8% YoY to Rmb169m.

Income from asset-light business grew 56.2% YoY to Rmb16.4m.

Fig 1 Revenue from park operation Fig 2 Gross profit from park operation

Source: Corporate presentation, January 2019 Source: Corporate presentation, company filings, January 2019

1,159.6

1,295.8

1,429.1

1,617.2

10%

11%

12%

13%

14%

15%

0

500

1,000

1,500

2,000

2014 2015 2016 2017

Revenue from park operation (Rmb mn) YoY

592.3

718.8

798.9

878.7

50%

52%

54%

56%

58%

60%

0

200

400

600

800

1,000

2014 2015 2016 2017

Gross profit from park operation segment (Rmb mn)

GPM of park operation segment


28 January 2019 44

Fig 3 Ticket revenue Fig 4 Non-ticket revenue

Source: Corporate presentation, January 2019 Source: Corporate presentation, January 2019

Fig 5 Revenue breakdown: Ticket vs non-ticket Fig 6 Park-derived spending income*

Source: Corporate presentation, January 2019 Source: Corporate presentation, January 2019. *Including income from

merchandise, catering, hotel, and in-park paid entertainment program.

Fig 7 Sales channel composition (based on ticket attendance*)

Fig 8 Asset-light business income

Source: Corporate presentation, January 2019. *excludes Dalian Laohutan Ocean Park

Source: Corporate presentation, January 2019

943.1

1049.2 1069.5

1182.7

0%

2%

4%

6%

8%

10%

12%

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017

Ticket revenue (Rmb mn) YoY

216.6246.6

359.6

434.5

0%

10%

20%

30%

40%

50%

0

100

200

300

400

500

2014 2015 2016 2017

Non-ticket revenue (Rmb mn) YoY

81.3% 81.0%74.8% 73.1%

18.7% 19.0%25.2% 26.9%

0%

20%

40%

60%

80%

100%

2014 2015 2016 2017

Ticket revenue Non-ticket revenue

168.5185.6

229.9

285.5

0%

5%

10%

15%

20%

25%

30%

0

50

100

150

200

250

300

2014 2015 2016 2017

Park-derived spending income (Rmb mn) YoY

52.6% 50.6%42.6%

37.3%

41.4%40.6%

42.1%

40.2%

6.1% 8.8%15.3%

22.5%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017

Group Individual Online

0.0 2.4

42.8

53.1

0

10

20

30

40

50

60

2014 2015 2016 2017

Asset-light business income (Rmb mn)


28 January 2019 45

Haichang Ocean Park (2255 HK, Not rated)

Interim Results 2H/16A 1H/17A 2H/17A 1H/18A Profit & Loss FY14A FY15A FY16A FY17A

Revenue m 987 644 1,036 659 Revenue m 1,531 1,417 1,650 1,680 Gross Profit m 601 320 589 299 Gross Profit m 674 786 901 910 Cost of Goods Sold m 385 324 447 360 Cost of Goods Sold m 858 630 748 771 EBITDA m 438 282 451 368 EBITDA m 709 801 726 732 Depreciation m 81 79 83 89 Depreciation m 179 174 168 162 Amortisation m 2 8 9 14 Amortisation m 14 27 18 17 EBIT m 354 195 359 265 EBIT m 515 600 540 553 Net Interest Income m -70 -68 -78 -102 Net Interest Income m -160 -137 -142 -147 Forex Gains / Losses m -2 1 0 0 Forex Gains / Losses m 20 -14 -3 1 Associates m -1 0 0 0 Associates m 0 0 -1 0 Other Pre-Tax Income m 23 -1 0 0 Other Pre-Tax Income m 0 14 24 0 Pre-Tax Profit m 304 126 281 163 Pre-Tax Profit m 375 463 418 407 Tax Expense m -128 -69 -47 -82 Tax Expense m -164 -213 -201 -116 Net Profit m 162 55 225 82 Net Profit m 192 231 201 280 Minority Interests m 13 2 9 -1 Minority Interests m 19 19 17 12

Reported Earnings m 162 55 225 82 Reported Earnings m 192 231 201 280 Adjusted Earnings m 170 54 232 -21 Adjusted Earnings m 90 151 208 286

EPS (rep) ¢ 4.1 1.4 5.6 2.1 EPS (rep) ¢ 5.05 5.77 5.02 6.99 EPS (adj) ¢ 4.2 1.4 5.8 -0.5 EPS (adj) ¢ 2.36 3.78 5.20 7.15 EPS Growth (adj) % 3.7 42.3 36.4 NA EPS Growth (adj) % 57.6 59.9 37.6 37.5 PE (rep) x 27.9 24.4 28.0 20.1 PE (adj) x 59.5 37.2 27.0 19.7 EBITDA Margin % 44.4 43.8 43.5 55.8 Dividend m 0 0 0 0 EBIT Margin % 35.9 30.2 34.6 40.2 Total DPS ¢ 0.00 0.00 0.00 0.00 Earnings Split % 80.8 19.7 80.3 NA Total Div Yield % 0.0 0.0 0.0 0.0 Revenue Growth % 11.5 -2.9 5.0 2.4 Basic Shares Outstanding m 3,805 4,000 4,000 4,000 EBIT Growth % -9.1 4.6 1.3 36.3 Diluted Shares Outstanding m 3,805 4,000 4,000 4,000


Revenue Growth % 11.1 -7.5 16.4 1.8 EBITDA m 709 801 726 732 EBITDA Growth % 15.6 13.1 -9.4 0.8 Tax paid m -89 -95 -131 -187 EBIT Growth % 22.0 16.6 -10.0 2.4 Chgs in Working Cap m -160 70 -155 592 Gross Profit Margin % 44.0 55.5 54.6 54.1 Net Interest Paid m -182 -144 -152 -164 EBITDA Margin % 46.3 56.6 44.0 43.6 Other m 32 33 139 91 EBIT Margin % 33.6 42.4 32.7 32.9 Operating Cashflow m 311 665 428 1,066 Net Profit Margin % 12.5 16.3 12.2 16.7 Acquisitions m -3 0 -48 -32 Payout Ratio % 0.0 0.0 0.0 0.0 Capex m -158 -913 -745 -1,963 EV/EBITDA x 9.7 8.8 10.5 12.4 Asset Sales m 36 0 0 4 EV/EBIT x 13.3 11.7 14.2 16.4 Other m 1,509 -232 -113 -189

Investing Cashflow m 1,384 -1,144 -905 -2,180 Balance Sheet Ratios Dividend (Ordinary) m -476 0 NA NA ROE % 7.7 6.2 5.1 6.7 Equity Raised m 1,856 0 0 0 ROA % 2.3 2.7 2.3 2.6 Debt Movements m -616 -404 536 1,831 Net Debt/Equity % 32.7 34.9 48.1 77.5 Other m -1,428 315 -156 -283 Price/Book x 1.5 1.4 1.3 1.3 Financing Cashflow m -662 -89 380 1,547 FX Effect m 1 3 2 -2 Net Chg in Cash m 1,034 -565 -95 432 Free Cashflow m 153 -247 -316 -897

Balance Sheet FY14A FY15A FY16A FY17A Cash m 1,551 970 873 1,305 Receivables m 58 64 81 171 Inventories m 1,039 706 795 762 Fixed Assets m 4,925 6,058 6,674 8,985 Intangibles m 8 9 12 12 Other Assets m 853 543 763 897 Total Assets m 8,434 8,351 9,199 12,132 Payables m 854 811 886 1,717 Short Term Debt m 1,311 763 1,322 1,775 Long Term Debt m 1,460 1,603 1,580 2,957 Other Liabilities m 1,082 1,179 1,193 1,259 Total Liabilities m 4,706 4,356 4,980 7,709 Shareholders' Funds m 2,366 2,366 2,366 2,366 Minority Interests m 151 170 187 114 Other m 1,211 1,459 1,666 1,943 Total S/H Equity m 3,728 3,995 4,219 4,423 Total Liab & S/H Funds m 8,434 8,351 9,199 12,132


28 January 2019 46


EQUITIES

357 HK Not rated Stock price as of 25/01/2019 HK$ 6.73 GICS sector Transportation

Infrastructure Market cap HK$m 3,184.7 Avg Value Traded (3m) HK$m 1.2 12m high/low HK$ 12.30/6.17 PER FY17 x 5.7 P/BV FY 17 x 0.7


YE Dec (RMBm) 2015A 2016A 2017A

Revenue 1,063 1,209 1,470 % growth 20.6 13.7 21.6 EBITDA 644 763 859 % growth 18.4 18.6 12.5 EPS 92.7 83.0 102.4 % growth 31.4 -10.4 23.3 EBIT Margin 54.3 55.3 51.0


Share Price Driver

Thematic

Growth

Value

Event


Share price perf. vs Hang Seng Index


Analysts




Eric Zong +852 3922 4749 [email protected]

MacVisit: Regal International Airport Extension comes in time

Key points Phase 2 extension will raise capacity to 35m passenger throughput. Management expects Meilan Airport DFS to benefit from CDFG supply. Introducing more international air routes.

Event We met with management of Regal International, the operator of Haikou

Meilan International Airport (HAK). Phase 2 extension is coming just in time for growing traffic demand, while Meilan Airport DFS expects to benefit from cooperation with its new supplier China Duty Free Group (CDFG).

Key findings Phase 2 extension to raise capacity to 35m passenger throughput. In

2018, total passenger throughput of HAK increased 6.8% YoY to over 24m, far exceeding its designed capacity of 15m. The airport is now extending into Phase 2 which will be put into operation by 2019 year-end, and could raise total annual capacity to 35m passenger throughput. Management expects positive growth for passenger throughput in 2019 and double-digit growth in 2020 following the opening of Phase 2. As both HAK and Sanya Phoenix Airport are currently operating over capacity, this extension should help to meet growing traffic demand, according to management.

Management expects Meilan Airport DFS to benefit from CDFG supply. Meilan DFS covers a total operating area of 30k square meters and offers over 400 brands. It records an ASP of ~Rmb2,000 with a conversion rate of 10%. Management expects the DFS to have generated a revenue of Rmb2.3bn in 2018, while the airport’s share should remain small as its commission rate is only ~14%, much lower than SHIA (42.5%) and BCIA (~45%). Given HAK’s 24m passenger throughput is quite close to BCIA’s 25m international passenger throughput, the lower commission rate could imply lower traffic quality in terms of duty-free conversion rate and ASP. There is a chance for a commission increase with improving traffic quality in the future, given that they renegotiate commission contract every three years, the next renewal date being this year-end. The DFS has accepted CDFG as its new supplier after a seven-year supply contract with DFS Group which expired on 19 January. Management is positive about the change as CDFG should provide more stable supply and access to more international brands. Currently perfume & cosmetics contribute 60% of sales, and management aims to bring this ratio down to a more normal level of ~52% after cooperation with CDFG.

Introducing more international air routes. HAK currently has 257 domestic air routes and 46 international ones. In 2018, international passenger throughput grew 29% YoY to 1.15m, surpassing 1m for the first time. Management addressed that it will work to increase the number of international air routes in 2019, with destinations in Japan/Russia/Middle East/Europe under consideration. It will also allocate additional time slots to international routes first.

Financials In 1H18, revenue rose 25.5% YoY to Rmb926.3m, while net profit grew 18.9%

YoY to Rmb371.8m.

GPM improved 3% YoY to 61.6% in 1H18.

15000

20000

25000

30000

35000

0

2

4

6

8

10

12

357 HK Equity HSI index








28 January 2019 47

Ownership


Major shareholders at the end of 1H18:

Haikou Meilan International Airport Company Limited owns 50.19%

Oriental Patron Financial Services Group Limited owns 19.94%

Commercial operations at the Meilan Airport commenced on 25 May 1999.

The H shares of the company were issued and listed on HKEX on 18 November 2002.

On 6 November 2003, the company was approved by the Ministry of Commerce of the PRC to convert into a foreign invested joint stock company.

The company changed its name from “Hainan Meilan International Airport Company Limited” to “HNA Infrastructure Company Limited” in March 2015, and then to “Regal International Airport Group Company Limited” in August 2018.

Balance sheet data and refinancing (As of 30 June 2018)


Cash at bank and on hand of Rmb211m

Fixed assets of Rmb2,519m

Debentures payable of Rmb518m


Mr. Liao Hongyu, aged 39, is the chairman and an Executive Director of the company. Mr. Liao successively served in various roles in HNA Group Co., Ltd.

Mr. Tu Haidong, aged 40, is the president and an Executive Director of the company. Mr. Tu has extensive experience in corporate governance and infrastructure construction management.

Mr. Zhou Feng, aged 46, is an Executive Director and chief financial officer of the company. Mr. Zhou has over 25 years of experience in finance and corporate management.



Revenue grew 25.5% YoY to Rmb926m.

Gross profit grew 32% YoY to Rmb571m.

Net profit attributable to owners of the parent grew 18.9% to Rmb372m.

Revenue from aviation business grew 15.8% YoY to Rmb487m.

Revenue from non-aviation business grew 38.4% YoY to Rmb439m.

Fig 1 Meilan Airport passenger throughput Fig 2 Meilan Airport aircraft movements

Source: Company filings, People.cn, January 2019 Source: Wind, Company filings, January 2019

0%

5%

10%

15%

20%

25%

-

5,000

10,000

15,000

20,000

25,000

2010 2011 2012 2013 2014 2015 2016 2017 2018


0%

5%

10%

15%

20%

-

50

100

150

200

2010 2011 2012 2013 2014 2015 2016 2017 2018

Aircraft movements ('000) YoY


28 January 2019 48

Fig 3 Aviation revenue and YoY Fig 4 Non-aviation revenue and YoY


Fig 5 Revenue breakdown: Aviation vs. Non-aviation Fig 6 Meilan Airport DFS total revenue and YoY


Fig 7 Meilan Airport DFS No. of shopping customers and YoY

Fig 8 Meilan Airport DFS ASP


494.0

580.0

680.3

826.8

487.3

0%

10%

20%

30%

0

100

200

300

400

500

600

700

800

900

1,000

2014 2015 2016 2017 1H18

Aviation revenue (Rmb mn) YoY

388.0

483.4 528.4

643.1

439.1

0%

10%

20%

30%

40%

0

100

200

300

400

500

600

700

800

900

1,000

2014 2015 2016 2017 1H18

Non-aviation revenue (Rmb mn) YoY

56.0% 54.5% 56.3% 56.2% 52.6%

44.0% 45.5% 43.7% 43.8% 47.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2014 2015 2016 2017 1H18

Aviation revenue Non-aviation revenue

919

1,239

1,489

2,052

1,175

2,300

0%

10%

20%

30%

40%

50%

0

500

1,000

1,500

2,000

2,500

2014 2015 2016 2017 1H18 2018E

Meilan Airport DFS total revenue (Rmb mn) YoY

511

642

788

1,098

645

0%

10%

20%

30%

40%

50%

0

200

400

600

800

1,000

1,200

2014 2015 2016 2017 1H18

Meilan Airport DFS No. of shopping customers ('000) YoY

1,797

1,930

1,889

1,869

1,822

1,700

1,800

1,900

2,000

2014 2015 2016 2017 1H18

Meilan Airport DFS ASP (Rmb)


28 January 2019 49

Regal International Airport (357 HK, Not rated) Interim Results 2H/16A 1H/17A 2H/17A 1H/18A Profit & Loss FY14A FY15A FY16A FY17A

Revenue m 581 738 732 926 Revenue m 882 1,063 1,209 1,470 Gross Profit m 343 432 387 571 Gross Profit m 540 637 731 819 Cost of Goods Sold m 231 297 333 340 Cost of Goods Sold m 326 406 462 630 EBITDA m 360 452 407 599 EBITDA m 544 644 763 859 Depreciation m 46 49 56 47 Depreciation m 59 62 91 105 Amortisation m 2 2 2 19 Amortisation m 1 4 4 4 EBIT m 312 401 348 534 EBIT m 484 577 669 749 Net Interest Income m -216 -25 -164 -80 Net Interest Income m -156 -180 -232 -189 Forex Gains / Losses m -54 8 0 0 Forex Gains / Losses m -8 -73 -81 8 Associates m -25 35 -19 40 Associates m 31 68 -1 17 Other Pre-Tax Income m 183 -1 66 0 Other Pre-Tax Income m 86 187 186 65 Pre-Tax Profit m 201 418 232 493 Pre-Tax Profit m 439 579 541 650 Tax Expense m -58 -99 -58 -118 Tax Expense m -101 -134 -137 -157 Net Profit m 140 313 172 372 Net Profit m 334 439 393 484 Minority Interests m 3 6 2 4 Minority Interests m 4 6 10 9

Reported Earnings m 140 313 172 372 Reported Earnings m 334 439 393 484 Adjusted Earnings m 140 313 172 372 Adjusted Earnings m 334 439 393 484

EPS (rep) ¢ 29.5 66.1 36.3 78.6 EPS (rep) ¢ 70.55 92.72 83.04 102.37 EPS (adj) ¢ 29.5 66.1 36.3 78.6 EPS (adj) ¢ 70.55 92.72 83.04 102.37 EPS Growth (adj) % -32.5 23.5 22.9 18.9 EPS Growth (adj) % -2.4 31.4 -10.4 23.3 PE (rep) x 8.2 6.2 6.9 5.6 PE (adj) x 8.2 6.2 6.9 5.6 EBITDA Margin % 61.9 61.2 55.6 64.7 Dividend m 83 114 79 106 EBIT Margin % 53.7 54.3 47.6 57.6 Total DPS ¢ 17.60 24.00 16.70 22.40 Earnings Split % 35.5 64.6 35.4 NA Total Div Yield % 3.1 4.2 2.9 3.9 Revenue Growth % 18.2 17.7 25.9 25.5 Basic Shares Outstanding m 473 473 473 473 EBIT Growth % 20.7 12.4 11.7 33.1 Diluted Shares Outstanding m 473 473 473 473


Revenue Growth % 16.0 20.6 13.7 21.6 EBITDA m 544 644 763 859 EBITDA Growth % 15.6 18.4 18.6 12.5 Tax paid m -112 -164 -167 -149 EBIT Growth % 16.6 19.2 15.9 12.0 Chgs in Working Cap m -44 -109 298 311 Gross Profit Margin % 61.2 59.9 60.5 55.7 Net Interest Paid m 0 0 0 0 EBITDA Margin % 61.6 60.5 63.2 58.4 Other m 31 64 74 43 EBIT Margin % 54.9 54.3 55.3 51.0 Operating Cashflow m 420 434 969 1,063 Net Profit Margin % 37.9 41.3 32.5 33.0 Acquisitions m 0 0 0 0 Payout Ratio % 24.9 25.9 20.1 21.8 Capex m -739 -1,621 -1,265 -286 EV/EBITDA x 6.3 7.7 6.9 5.4 Asset Sales m 1 0 1 0 EV/EBIT x 7.1 8.6 7.9 6.2 Other m -380 33 426 -9

Investing Cashflow m -1,118 -1,588 -838 -295 Balance Sheet Ratios Dividend (Ordinary) m NA NA NA NA ROE % 12.1 14.4 11.3 12.5 Equity Raised m 0 0 1,011 0 ROA % 5.9 6.9 5.2 5.6 Debt Movements m -110 592 -1,123 -596 Net Debt/Equity % 24.0 68.5 68.6 47.4 Other m -304 -300 -289 -252 Price/Book x 0.9 0.8 0.7 0.7 Financing Cashflow m -414 292 -401 -847 FX Effect m -1 0 0 0 Net Chg in Cash m -1,114 -861 -271 -79 Free Cashflow m -319 -1,186 -297 777

Balance Sheet FY14A FY15A FY16A FY17A Cash m 1,885 1,023 752 673 Receivables m 121 303 254 331 Inventories m 0 0 1 0 Fixed Assets m 1,345 2,345 3,664 3,607 Intangibles m 182 178 174 165 Other Assets m 2,190 3,113 3,350 4,302 Total Assets m 5,722 6,962 8,196 9,078 Payables m 15 19 22 78 Short Term Debt m 473 1,461 639 216 Long Term Debt m 2,106 1,790 2,671 2,397 Other Liabilities m 236 440 1,137 2,295 Total Liabilities m 2,830 3,711 4,468 4,986 Shareholders' Funds m 1,072 1,072 1,072 1,072 Minority Interests m 15 21 32 37 Other m 1,804 2,158 2,624 2,983 Total S/H Equity m 2,891 3,251 3,728 4,092 Total Liab & S/H Funds m 5,722 6,962 8,196 9,078



28 January 2019 50

Important disclosures: Recommendation definitions Macquarie – Asia, USA, Canada, Europe and Mazi Macquarie (SA): Outperform – expected return >10% Neutral – expected return from -10% to +10% Underperform – expected return <-10% Macquarie - Australia/New Zealand Outperform – expected return >10% Neutral – expected return from 0% to 10% Underperform – expected return <0% Note: expected return is reflective of a Medium Volatility stock and should be assumed to adjust proportionately with volatility risk

Volatility index definition* This is calculated from the volatility of historical price movements. Very high–highest risk – Stock should be expected to move up or down 60–100% in a year – investors should be aware this stock is highly speculative. High – stock should be expected to move up or down at least 40–60% in a year – investors should be aware this stock could be speculative. Medium – stock should be expected to move up or down at least 30–40% in a year. Low–medium – stock should be expected to move up or down at least 25–30% in a year. Low – stock should be expected to move up or down at least 15–25% in a year. * Applicable to select stocks in Asia/Australia/NZ/Canada Recommendations – 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations

Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards).

Recommendation proportions – For quarter ending 31 December 2018 AU/NZ Asia RSA USA CA EUR Outperform 53.56% 57.51% 47.06% 48.65% 69.08% 51.23% (for global coverage by Macquarie, 4.12% of stocks followed are investment banking clients) Neutral 31.09% 30.24% 34.12% 46.22% 26.32% 39.41% (for global coverage by Macquarie, 1.92% of stocks followed are investment banking clients) Underperform 15.36% 12.25% 18.82% 5.14% 4.61% 9.36% (for global coverage by Macquarie, 0.47% of stocks followed are investment banking clients)

Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures.

Analyst certification: We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Ltd total revenues, a portion of which are generated by Macquarie Group’s Investment Banking activities. General disclaimers: Macquarie Securities (Australia) Ltd; Macquarie Capital (Europe) Ltd; Macquarie Capital Markets Canada Ltd; Macquarie Capital Markets North America Ltd; Macquarie Capital (USA) Inc; Macquarie Capital Limited, Taiwan Securities Branch; Macquarie Capital Securities (Singapore) Pte Ltd; Macquarie Securities (NZ) Ltd; Mazi Macquarie Securities (RF) (Pty) Ltd; Macquarie Capital Securities (India) Pvt Ltd; Macquarie Capital Securities (Malaysia) Sdn Bhd; Macquarie Securities Korea Limited and Macquarie Securities (Thailand) Ltd are not authorized deposit-taking institutions for the purposes of the Banking Act 1959 (Commonwealth of Australia), and their obligations do not represent deposits or other liabilities of Macquarie Bank Limited ABN 46 008 583 542 (MBL) or MGL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of any of the above mentioned entities. MGL provides a guarantee to the Monetary Authority of Singapore in respect of the obligations and liabilities of Macquarie Capital Securities (Singapore) Pte Ltd for up to SGD 35 million. This research has been prepared for the general use of the wholesale clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient you must not use or disclose the information in this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. MGL has established and implemented a conflicts policy at group level (which may be revised and updated from time to time) (the "Conflicts Policy") pursuant to regulatory requirements (including the FCA Rules) which sets out how we must seek to identify and manage all material conflicts of interest. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. In preparing this research, we did not take into account your investment objectives, financial situation or particular needs. Macquarie salespeople, traders and other professionals may provide oral or written market commentary or trading strategies to our clients that reflect opinions which are contrary to the opinions expressed in this research. Macquarie Research produces a variety of research products including, but not limited to, fundamental analysis, macro-economic analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Before making an investment decision on the basis of this research, you need to consider, with or without the assistance of an adviser, whether the advice is appropriate in light of your particular investment needs, objectives and financial circumstances. There are risks involved in securities trading. The price of securities can and does fluctuate, and an individual security may even become valueless. International investors are reminded of the additional risks inherent in international investments, such as currency fluctuations and international stock market or economic conditions, which may adversely affect the value of the investment. This research is based on information obtained from sources believed to be reliable but we do not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. No member of the Macquarie Group accepts any liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. Clients should contact analysts at, and execute transactions through, a Macquarie Group entity in their home jurisdiction unless governing law permits otherwise. The date and timestamp for above share price and market cap is the closed price of the price date. #CLOSE is the final price at which the security is traded in the relevant exchange on the date indicated. Members of the Macro Strategy team are Sales & Trading personnel who provide desk commentary that is not a product of the Macquarie Research department or subject to FINRA Rule 2241 or any other regulation regarding independence in the provision of equity research. Country-specific disclaimers: Australia: In Australia, research is issued and distributed by Macquarie Securities (Australia) Ltd (AFSL No. 238947), a participating organization of the Australian Securities Exchange. Macquarie Securities (Australia) Limited staff involved with the preparation of research have regular interaction with companies they cover. Additionally, Macquarie Group Limited does and seeks to do business with companies covered by Macquarie Research. There are robust information barriers in place to protect the independence of Macquarie Research’s product. However, recipients of Macquarie Research should be aware of this potential conflict of interest. New Zealand: In New Zealand, research is issued and distributed by Macquarie Securities (NZ) Ltd, a NZX Firm. Canada: In Canada, research is prepared, approved and distributed by Macquarie Capital Markets Canada Ltd., a (i) member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund, and (ii) participating organisation of the Toronto



28 January 2019 51

Stock Exchange, TSX Venture Exchange & Montréal Exchange. This research is distributed in the United States, as third party research by Macquarie Capital Markets North America Ltd., which is a registered broker-dealer and member of Financial Industry Regulatory Authority and the Securities Investor Protection Corporation. Macquarie Capital Markets North America Ltd. accepts responsibility for the contents of reports issued by Macquarie Capital Markets Canada Ltd. in the United States and sent to US persons. Any US person wishing to effect transactions in the securities described in the reports issued by Macquarie Capital Markets Canada Ltd. should do so with Macquarie Capital Markets North America Ltd. This research is intended for distribution in the United States only to major Institutional Investors (as such term is defined in SEC 15a-6 and Section 15 of the Securities Exchange Act of 1934, as amended) and is not intended for the use of any person or entity that is not a major institutional investor. Research analysts of Macquarie Capital Markets Canada Ltd. are not registered/qualified as research analysts with FINRA. The Research Distribution Policy of Macquarie Capital Markets Canada Ltd. is to allow all clients that are entitled to have equal access to our research. United Kingdom: In the United Kingdom, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated by the Financial Conduct Authority (No. 193905). Germany: In Germany, this research is issued and/or distributed by Macquarie Capital (Europe) Limited, Niederlassung Deutschland, which is authorised and regulated by the UK Financial Conduct Authority (No. 193905). and in Germany by BaFin. France: In France, research is issued and distributed by Macquarie Capital (Europe) Ltd, which is authorised and regulated in the United Kingdom by the Financial Conduct Authority (No. 193905). Hong Kong & Mainland China: In Hong Kong, research is issued and distributed by Macquarie Capital Limited, which is licensed and regulated by the Securities and Futures Commission. In Mainland China, Macquarie Securities (Australia) Limited Shanghai Representative Office only engages in non-business operational activities excluding issuing and distributing research. Only non-A share research is distributed into Mainland China by Macquarie Capital Limited. Japan: In Japan, research is Issued and distributed by Macquarie Capital Securities (Japan) Limited, a member of the Tokyo Stock Exchange, Inc. and Osaka Exchange, Inc. (Financial Instruments Firm, Kanto Financial Bureau (kin-sho) No. 231, a member of Japan Securities Dealers Association). India: In India, research is issued and distributed by Macquarie Capital Securities (India) Pvt. Ltd. (CIN: U65920MH1995PTC090696), 92, Level 9, 2 North Avenue, Maker Maxity, Bandra Kurla Complex, Bandra (East), Mumbai – 400 051, India, which is a SEBI registered Research Analyst having registration no. INH000000545. Malaysia: In Malaysia, research is issued and distributed by Macquarie Capital Securities (Malaysia) Sdn. Bhd. (Company registration number: 463469-W) which is a Participating Organisation of Bursa Malaysia Berhad and a holder of Capital Markets Services License issued by the Securities Commission. Taiwan: In Taiwan, research is issued and distributed by Macquarie Capital Limited, Taiwan Securities Branch, which is licensed and regulated by the Financial Supervisory Commission. No portion of the report may be reproduced or quoted by the press or any other person without authorisation from Macquarie. Nothing in this research shall be construed as a solicitation to buy or sell any security or product. The recipient of this report shall not engage in any activities which may give rise to potential conflicts of interest to the report. Research Associate(s) in this report who are registered as Clerks only assist in the preparation of research and are not engaged in writing the research. Macquarie may be in past one year or now being an Issuer of Structured Warrants on securities mentioned in this report. Thailand: In Thailand, research is produced, issued and distributed by Macquarie Securities (Thailand) Ltd. Macquarie Securities (Thailand) Ltd. is a licensed securities company that is authorized by the Ministry of Finance, regulated by the Securities and Exchange Commission of Thailand and is an exchange member of the Stock Exchange of Thailand. The Thai Institute of Directors Association has disclosed the Corporate Governance Report of Thai Listed Companies made pursuant to the policy of the Securities and Exchange Commission of Thailand. Macquarie Securities (Thailand) Ltd does not endorse the result of the Corporate Governance Report of Thai Listed Companies but this Report can be accessed at: http://www.thai-iod.com/en/publications.asp?type=4. South Korea: In South Korea, unless otherwise stated, research is prepared, issued and distributed by Macquarie Securities Korea Limited, which is regulated by the Financial Supervisory Services. Information on analysts in MSKL is disclosed at http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002001000. South Africa: In South Africa, research is issued and distributed by Mazi Macquarie Securities (RF) (Pty) Ltd, a member of the JSE Limited. Singapore: In Singapore, research is issued and distributed by Macquarie Capital Securities (Singapore) Pte Ltd (Company Registration Number: 198702912C), a Capital Markets Services license holder under the Securities and Futures Act to deal in securities and provide custodial services in Singapore. Pursuant to the Financial Advisers (Amendment) Regulations 2005, Macquarie Capital Securities (Singapore) Pte Ltd is exempt from complying with sections 25, 27 and 36 of the Financial Advisers Act. All Singapore-based recipients of research produced by Macquarie Capital (Europe) Limited, Macquarie Capital Markets Canada Ltd, Mazi Macquarie Securities (RF) (Pty) Ltd and Macquarie Capital (USA) Inc. represent and warrant that they are institutional investors as defined in the Securities and Futures Act. United States: In the United States, research is issued and distributed by Macquarie Capital (USA) Inc., which is a registered broker-dealer and member of FINRA. Macquarie Capital (USA) Inc, accepts responsibility for the content of each research report prepared by one of its non-US affiliates when the research report is distributed in the United States by Macquarie Capital (USA) Inc. Macquarie Capital (USA) Inc.’s affiliate’s analysts are not registered as research analysts with FINRA, may not be associated persons of Macquarie Capital (USA) Inc., and therefore may not be subject to FINRA rule restrictions on communications with a subject company, public appearances, and trading securities held by a research analyst account. Information regarding futures is provided for reference purposes only and is not a solicitation for purchases or sales of futures. Any persons receiving this report directly from Macquarie Capital (USA) Inc. and wishing to effect a transaction in any security described herein should do so with Macquarie Capital (USA) Inc. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures, or contact your registered representative at 1-888-MAC-STOCK, or write to the Supervisory Analysts, Research Department, Macquarie Securities, 125 W.55th Street, New York, NY 10019. © Macquarie Group

http://www.thai-iod.com/en/publications.asp?type=4

http://www.thai-iod.com/en/publications.asp?type=4

http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002001000

http://dis.kofia.or.kr/websquare/index.jsp?w2xPath=/wq/fundMgr/DISFundMgrAnalystStut.xml&divisionId=MDIS03002001000000&serviceId=SDIS03002001000


Equities

Asia Research Head of Equity Research Jake Lynch (Asia – Head) (852) 3922 3583 Hiroyuki Sakaida (Japan – Head) (813) 3512 6695 Conrad Werner (ASEAN – Head) (65) 6601 0182

Automobiles, Auto Parts Janet Lewis (China, Japan) (813) 3512 7856 Allen Yuan (China) (8621) 2412 9009 James Hong (Korea) (822) 3705 8661 Amit Mishra (India) (9122) 6720 4084

Banks and Financials Scott Russell (Asia) (852) 3922 3567 Dexter Hsu (China, Taiwan) (8862) 2734 7530 Keisuke Moriyama (Japan) (813) 3512 7476 Chan Hwang (Korea) (822) 3705 8643 Suresh Ganapathy (India) (9122) 6720 4078 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Gilbert Lopez (Philippines) (632) 857 0892 Peach Patharavanakul (Thailand) (662) 694 7753

Basic Materials, Commodities David Ching (China, Hong Kong) (852) 3922 1823 Harunobu Goroh (Japan) (813) 3512 7886 Yasuhiro Nakada (Japan) (813) 3512 7862 Anna Park (Korea) (822) 3705 8669 Sumangal Nevatia (India) (9122) 6720 4093 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Farrah Aqlima (Malaysia) (603) 2059 8987

Conglomerates David Ng (China, Hong Kong) (852) 3922 1291 Gilbert Lopez (Philippines) (632) 857 0892 Conrad Werner (Singapore) (65) 6601 0182

Consumer, Gaming Linda Huang (Asia) (852) 3922 4068 Terence Chang (China, Hong Kong) (852) 3922 3581 Sunny Chow (China, Hong Kong) (852) 3922 3768 Leon Rapp (Japan) (813) 3512 7879 Kwang Cho (Korea) (822) 3705 4953 Amit Sinha (India) (9122) 6720 4085 Robert Pranata (Indonesia) (6221) 2598 8366 Richardo Walujo (Indonesia) (6221) 2598 8369 Denise Soon (Malaysia) (603) 2059 8845 Karisa Magpayo (Philippines) (632) 857 0899 Chalinee Congmuang (Thailand) (662) 694 7993

Emerging Leaders Jake Lynch (Asia) (852) 3922 3583 Corinne Jian (Greater China) (8862) 2734 7522 Marcus Yang (China) (8621) 2412 9087 Kwang Cho (Korea) (822) 3705 4953 Conrad Werner (ASEAN) (65) 6601 0182 Bo Denworalak (Thailand) (662) 694 7774

Infrastructure, Industrials, Transportation Patrick Dai (China) (8621) 2412 9082 Eric Zong (China, Hong Kong) (852) 3922 4749 Kunio Sakaida (Japan) (813) 3512 7873 James Hong (Korea) (822) 3705 8661 Corinne Jian (Taiwan) (8862) 2734 7522 Inderjeetsingh Bhatia (India) (9122) 6720 4087

Internet, Media and Software Wendy Huang (Asia) (852) 3922 3378 John Wang (China, Hong Kong) (852) 3922 3578 Ellie Jiang (China, Hong Kong) (852) 3922 4110 Frank Chen (China, Hong Kong) (852) 3922 1433 Andy Kim (Korea) (822) 3705 8690 Alankar Garude (India) (9122) 6720 4134

Oil, Gas and Petrochemicals Aditya Suresh (Asia) (852) 3922 1265 Anna Park (Asia) (822) 3705 8669 Yasuhiro Nakada (Japan) (813) 3512 7862 Corinne Jian (Taiwan) (8862) 2734 7522 Ben Shane Lim (Malaysia) (603) 2059 8868 Yupapan Polpornprasert (Thailand) (662) 694 7729

Pharmaceuticals and Healthcare David Ng (China, Hong Kong) (852) 3922 1291 Xiang Gao (China, Hong Kong) (8621) 2412 9006 Corinne Jian (China) (8862) 2734 7522 Mi Hyun Kim (Korea) (822) 3705 8689 Alankar Garude (India) (9122) 6720 4134 Richardo Walujo (Indonesia) (6221) 259 88 369

Property, REIT David Ng (China, Hong Kong) (852) 3922 1291 Kelvin Tam (China) (852) 3922 1181 Keisuke Moriyama (Japan) (813) 3512 7476 Derrick Heng (Singapore) (65) 6601 0436 Abhishek Bhandari (India) (9122) 6720 4088 Richard Danusaputra (Indonesia) (6221) 2598 8368 Aiman Mohamad (Malaysia) (603) 2059 8986 Kervin Sisayan (Philippines) (632) 857 0893 Bo Denworalak (Thailand) (662) 694 7774

Technology Damian Thong (Asia, Japan) (813) 3512 7877 Jeffrey Ohlweiler (Greater China) (8862) 2734 7512 Kaylin Tsai (Greater China) (8862) 2734 7523 Lynn Luo (Greater China) (8862) 2734 7534 Patrick Liao (Greater China) (8862) 2734 7515 Verena Jeng (Greater China) (852) 3922 3766 Jin Guo (Greater China) (8621) 2412 9054 Daniel Kim (Korea) (822) 3705 8641 Abhishek Bhandari (India) (9122) 6720 4088 Farrah Aqlima (Malaysia) (603) 2059 8987

Telecoms Prem Jearajasingam (ASEAN) (603) 2059 8989 Nathania Nurhalim (Indonesia) (6221) 2598 8365 Kervin Sisayan (Philippines) (632) 857 0893

Utilities, Renewables Hiroyuki Sakaida (Japan) (813) 3512 6695 Patrick Dai (China) (8621) 2412 9082 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Karisa Magpayo (Philippines) (632) 857 0899

Strategy, Country Viktor Shvets (Asia, Global) (852) 3922 3883 David Ng (China, Hong Kong) (852) 3922 1291 Hiroyuki Sakaida (Japan) (813) 3512 6695 Chan Hwang (Korea) (822) 3705 8643 Jeffrey Ohlweiler (Taiwan) (8862) 2734 7512 Inderjeetsingh Bhatia (India) (9122) 6720 4087 Conrad Werner (ASEAN, Singapore) (65) 6601 0182 Jayden Vantarakis (Indonesia) (6221) 2598 8310 Anand Pathmakanthan (Malaysia) (603) 2059 8833 Gilbert Lopez (Philippines) (632) 857 0892 Peach Patharavanakul (Thailand) (662) 694 7753 Find our research at Macquarie: www.macquarieresearch.com Thomson: www.thomson.com/financial Reuters: www.knowledge.reuters.com Bloomberg: MAC GO Factset: http://www.factset.com/home.aspx CapitalIQ www.capitaliq.com Email [email protected] for access

Asia Sales Regional Heads of Sales Miki Edelman (Global) (1 212) 231 6121 Amelia Mehta (Asia) (65) 6601 0211 Alan Chen (Asia) (852) 3922 2019 Sandeep Bhatia (India) (9122) 6720 4101 Tim Huang (Indonesia) (6221) 2598 8303 Thomas Renz (Geneva) (41 22) 818 7712 Tomohiro Takahashi (Japan) (813) 3512 7823 John Jay Lee (Korea) (822) 3705 9988 Nik Hadi (Malaysia) (603) 2059 8888 Gino C Rojas (Philippines) (632) 857 0861

Regional Heads of Sales cont’d Paul Colaco (San Francisco) (1 415) 762 5003 Eric Lin (Taiwan) (8862) 2734 7590 Angus Kent (Thailand) (662) 694 7601 Mothlib Miah (UK/Europe) (44 20) 3037 4893 Christina Lee (US) (44 20) 3037 4873

Sales Trading Mark Weekes (Asia) (852) 3922 2084 Stanley Dunda (Indonesia) (6221) 515 1555

Sales Trading cont’d Suhaida Samsudin (Malaysia) (603) 2059 8888 Michael Santos (Philippines) (632) 857 0813 Chris Reale (New York) (1 212) 231 2555 Marc Rosa (New York) (1 212) 231 2555 Justin Morrison (Singapore) (65) 6601 0288 Brendan Rake (Thailand) (662) 694 7707 Mike Keen (UK/Europe) (44 20) 3037 4905

This publication was disseminated on 25 January 2019 at 18:34 UTC.

关注公号回复：社群加入“文旅帮天天向上”微信群，获取更多报告。

让一部分人先看到未来让一部分企业正确决策

china consumer tour takeaways hainan: positive outlook ... · premium-oriented sites like atlantis...

Documents