We downgrade our rating on China Travel （HK） to Hold with a new target priceof HKD2.55. The company has warned that earnings would drop by almost70% yoy after it sold its power plant business to its parent company. Althoughwe do not factor in the one-off valuation/earnings contribution from its powerplant, we expect recurring earnings to drop by 35% as a result of thechallenging tourism environment in Hong Kong （hotel, bus and travel agencysegment etc）。
　　China's tourism projects are delayed while HK's tourism environment is toughAlthough management had previously guided it would further expand andaccelerate its deployment in mainland China's popular tourist sites, we havenot seen any meaningful projects so far that could help drive the top line orearnings. Furthermore, earnings are being dragged down by its exposure toHong Kong as the number of mainland travelers visiting Hong Kong has fallenby 11% YTD. We expect this to have a negative impact on its hotel, bus andtravel agency business.
　　Cutting our 2016/17 earnings estimates by 42/43%We are lowering our earnings estimates to factor in challenges in the HK hotelbusiness, uncertainty in the expansion of its tourist attraction business, andpotential RMB depreciation. In addition, we do not expect the company to beable to turn its loss-making Zhuhai OSR business profitable in the near term.
　　Valuation and risks
　　We are cutting our target price to HKD2.55, based on PER-based SOTP. Ournew target price implies a 2016E PB of 0.8x vs. 0.9x previously. Key downsiderisks relate to acquisitions and uncertainty in the performance of new projects.
　　Key upside risks relate to a rebound in the number of travelers to Hong Kong.