1H20 results miss our forecast

Huangshan Tourism announced its 1H20 results: revenue fell 72.5%YoY to Rmb200mn, and attributable net loss expanded 152.6% YoY toRmb88.42mn. In 2Q20, revenue fell 71.9% YoY to Rmb130mn, andattributable net loss expanded 107.7% YoY to Rmb11.18mn. Theresults missed our expectations as strict COVID-19 containmentmeasures in 2Q20 slowed recovery in visitor traffic.

Slow recovery in domestic travel weighing on performance. Visitortraffic of Mount Huangshan fell 68.2% YoY to 516,000, and thenumber of visitors taking cableways and/or cable cars declined69.41% YoY to 999,500. We attribute the fluctuations in visitor trafficto resurgence of COVID-19 cases in China and strict COVID-19containment measures.

Financial analysis: In 1H20, investment income rose 625% YoY toRmb11.87mn thanks to interest from lending to BlueTown andfixed-return wealth management products. Gains from fair valuechanges reached Rmb13.09mn driven by investment in Saifu Fundand gains of variable-return wealth management products. The firmreceived Rmb5.09mn in non-recurring government subsidies in 1H20,excluding which 1H20 recurring loss grew 164.3% YoY to Rmb105mn.

Trends to watch

Mid-range/high-end leisure travel recovers faster in Chinapost-COVID-19; active M&A to seek growth. Amid a de facto halt inoutbound travel, more and more people are opting for mid-range/high-end travel in Sanya, boosting demand at Sanya Atlantis andoffshore duty-free shopping. Visitor traffic recovery is slow for natureresorts such as Mount Huangshan. However, the firm is activelyexpanding its offerings such as its Huashan Cave and Taiping Lakeprojects, and promoting investment in neighboring villages withtourism resources.

Financials and valuation

Given disappointing recovery in visitor traffic, we lower 2020–2021EPS forecasts 45% and 12% to Rmb0.13 and Rmb0.51. HuangshanA-share is trading at 18.4x 2021e P/E, and B-share at 10.3x P/E.

Maintain OUTPERFORM. Considering easing COVID-19 containmentmeasures may boost market expectations, we maintain A-share andB-share TP at Rmb10.25 （20.2x 2021e P/E with 10% upside） andUS$0.99 （13.5x 2021e P/E with 32% upside）。

Risks

Headwinds from COVID-19 last longer than expected; externalexpansion disappoints.