We upgrade China Travel HK to Buy from Hold with a new TP of HKD 2.7.
　　Although the company's growth was disappointing in 2016 （the share pricedropped by almost 30% over the year）， we believe the correction is excessive.
　　The company is trading at a PB （0.8x） 1 standard deviation below its historicalaverage. In addition, the company's five self-owned hotels in HK/Macau alone（valued at HKD 8bn） plus net cash （HKD 4bn） are equivalent to its currentmarket cap. This implies that its other businesses （hotels/tourist sites/oceanresorts/land in China） are free to investors.
　　New stock option scheme – a trigger for restructuringChina Travel has issued a total of 17.5 million shares at HKD2.3/sh to itsmanagement. As an SOE tourism conglomerate, the company holds manyvaluable assets, such as some tourist attractions in China. However, lack ofincentive was the primary reason for the loss-making of some of the projects.
　　Therefore, we believe the share option plan will incentivize the company'smanagement to restructure their business in 2017E. To reflect our positiveexpectations from restructuring, we increase our earnings forecast for 2017 by8.6%. Management guided that it will put Xianyang Ocean Spring Resort （OSR）and Jigongshan Mountain up for sale, as these two projects registered a lossof c. RMB 42m, accounting for 10% of China Travel's earnings.
　　There could be upside to the dividend yield in 2017E, due to asset disposalChina Travel's dividend yield used to be 3-6% under the payout policy of 50%.
　　However, after disposing of the power plant business （25% of total earnings），the 2016 dividend per share is expected to decline （the payout policy remainsat 50%）。 However, as the company will dispose of Xianyang OSR andJigongshan Mountain, we believe the payout ratio could increase to 65%-80%,a similar situation to in 2014-15. This would lead to upside to our currentdividend yield forecast in 2017E （our current forecast only factors in a 50%dividend payout）。
　　Valuation and risks
　　China Travel is trading at 0.8x PB. Our target price of HKD 2.7 is derived from aPER-based SOTP. Key risks relate to acquisitions, government policy changesand uncertainty over the performance of new projects