1H19 results in line with our forecast

1H19 revenue rose 6.8% YoY to Rmb728mn; net profit attributable toshareholders declined 23.2% YoY to Rmb168mn （Rmb0.23/sh）。 2Q19revenue rose 6.2% YoY to Rmb464mn; net profit attributable toshareholders rose 2.6% YoY to Rmb145mn. This is in line with ourforecast.

1H19 financials: Gross margin rose 0.6ppt YoY to 54.1% YoY as theincrease in visitor traffic partly offset the negative impact from theticket-price cut; selling expense climbed 26% YoY due to increasedmarketing; and other receivables rose Rmb130mn mainly due to theloan made to a joint-venture.

Cut in ticket price weighed on earnings. The number of visitors rose9.6% YoY to 1.62mn in 1H19. Ticket revenue fell 4.8% YoY due to theticket-price cut and gross margin dropped 1.7ppt YoY to 84.2%.

Visitor traffic growth helped revenue from hotels, travel agenciesand cableway to rise 20%, 23% and 17% YoY in 1H19. We attributevisitor traffic growth to the opening of the Hangzhou-Huangshanhigh-speed railway in 2018 and its increasing marketing expenses.

Trends to watch

External expansion continuing. In August 2019, the company andSaifu Tourism Culture Industry Development Fund jointly investedRmb60mn in Liubaili Houkui Tea, with Rmb11mn from Huangshan fora 9.17% stake. Liubaili Houkui Tea mainly engages in the planting,processing and selling of tea, and we believe this will help promotethe company's development in tea tourism and tea culture relatedindustries.

Financials and valuation

We maintain 2019/20e EPS at Rmb0.68 /Rmb0.71. The B-shares aretrading at 10.0x 2019e and 9.5x 2020e P/E. The A-shares are tradingat 13.4x 2019e and 12.7x 2020e P/E. Maintain OUTPERFORM andB-share TP of US$1.39 （14.4x 2019e and 13.6x 2020e P/E）， offering42.9% upside; A-share TP of Rmb12.20 （18.0x 2019e and 17.1x 2020eP/E）， offering 34.7% upside.

Risks

Bad weather hurting visitor traffic; expansion disappoints.