3Q19 results miss our forecast

In 1–3Q19, revenue rose 4.1% YoY to Rmb1.239bn, attributable netprofit fell 20.2% YoY to Rmb336mn and recurring attributable netprofit declined 3.9% YoY to Rmb320mn, with EPS at Rmb0.46. In3Q19, revenue rose 0.5% YoY to Rmb510mn, and attributable netprofit declined 16.9% YoY to Rmb168mn. Results missed ourexpectations due to rapid increase in expenses.

Tourist traffic continued to increase in 3Q19. Data from the localgovernment shows that the Huangshan resort received 330k visitorsin July and 480k in August, up 8.9% and 9.2% YoY. Improvingtransportation drove rapid growth in cableway revenue, partlyoffsetting the negative impact of lower ticket price in peak season.

In 3Q19, gross margin stayed largely flat YoY at 61.9%. Sales expensesrose 13.3% YoY and sales expense ratio reached 4.5% due toadvertising to attract tourists. G&A expenses rose 41% YoY and G&Aexpense ratio reached 12.8%. In 1–3Q19, investment income fell 89%YoY to Rmb12.41mn due to one-off income from disposal of HuaAnSecurities, and recurring net profit decline was narrower. For 1–3Q19,net operating cash flow fell 10% YoY to Rmb375mn, consistent withnet profit. Net investing cash flow was –Rmb1.064bn due topurchases of wealth management products and lending to others.

Trends to watch

The firm in October 2018 decided to develop Huashan Caves, andincreased investment by Rmb400mn in 1H19. Project constructionhas begun. The firm and Saifu Fund have jointly invested in 15projects, and we expect more ahead.

Financials and valuation

Given disappointing earnings, we trim our 2019-2020 EPS forecast 7%and 7% to Rmb0.63 and Rmb0.66. Huangshan A-share is trading at14x and 14x 2019e–2020e P/E, and B-share at 10x and 10x P/E.

Maintain OUTPERFORM, but cut A-share TP 7% to Rmb11.35 （18xand 17x 2019e–2020e P/E with 26% upside） and trim B-share TP16.5% to US$1.16 （13x and 12x 2019e–2020e P/E with 25% upside）。

Risks

Bad weather affecting tourist traffic; disappointing externalexpansion.