What's new

Huangshan announced on August 5 it would change the developmentplan for Huashan Caves and add a new project, with respectiveinvestments at Rmb350mn and Rmb168.5mn. In addition,Huangshan, Saifu Fund and Huangshan State-owned Asset OperationCompany plan to increase their investments in Taiping Lake Culture &Tourism (a subsidiary). Huangshan plans to invest Rmb50.65mn, andits shareholding ratio would remain unchanged at 50.96%.

Comments

High-quality assets; investment continues. We see MountHuangshan as a high-quality natural resort in China, but its touristtraffic has suffered bottlenecks in recent years. The firm has beenexpanding its tourism business beyond Mount Huangshan – e.g.

investment in Saifu Fund in 2016, acquisition of the Taiping Lakeproject in 2018, and investment in upgrading Huashan Caves.

Slow recovery of domestic tourism weighs on performance. MountHuangshan resort reopened following COVID-19 restrictions onFebruary 21, one of the first natural resorts to do so. Its daily touristtraffic remained below 10,000 at first – total tourist traffic declined81.2%, 33.0% and 78.9% YoY to 110,000 in 1Q20, 270,000 in April,and 80,000 in May. The resort saw large tourist crowds during theQingming Festival, and as a result reduced the maximum dailynumber of tourists from 20,000 to 15,000 on April 15. Due to strictCOVID-19 containment measures, June domestic visitors were about60% of last year’s level, and most were short-distance orintra-provincial trips. We foresee a pressured performance in 2Q20.

Recovery of domestic travel to accelerate in 2H20. Restrictions oncross-provincial group tours were relaxed in mid-July. Since April,about 10 provinces and municipalities including Anhui, Zhejiang,Hebei and Jiangxi have encouraged flexible working schedules with2.5-day weekends. In addition, a number of airlines have introducedunlimited weekend flight packages at affordable prices. We thusexpect the recovery in domestic travel to accelerate.

Valuation and recommendation

We maintain our 2020 and 2021 EPS forecasts at Rmb0.24 andRmb0.57. A-share is now trading at 37x and 16x 2020e and 2021eP/E, and B-share at 21x and 9x P/E. Maintain OUTPERFORM withA-share TP at Rmb10.25 (42x and 18x 2020e and 2021e P/E with 14%upside) and B-share TP at US$0.99 (28x and 12x 2020e and 2021e P/Ewith 34% upside).

Risks

Headwinds from COVID-19 linger longer than expected.