What’s new?
　　China Travel HK just announced a profit warning after market today. It statedthe company expected to record c. 70% decrease of its consolidated net profit（including non-recurring） in 2016.
　　The decrease is mainly due to non-recurring profit in 2015, in our viewWe would like to remind investors that China Travel HK also announced aprofit warning in 1H16, stating that it expected profit to drop by the samepercentage. As a result, we do not expect this full year profit warning to besurprising to the market. The announcement stated that the decrease is due toseveral reasons as detailed below.
　　Key reason is the one-off profit/disposal gain from power plant segmentThe company generated c. HKD 234 million profit from its power plant in 1H15and the disposal gain of the power plant in 2015 was HKD 429 million. As aresult, total one-off profit （which is non-recurring） in 2015 was HKD 663 million,accounting for c.50% of the total reported net profit in 2015. This is no longerthe case in 2016.
　　Impairment loss of Xianyang Ocean Spring ResortThe announcement disclosed that there is an impairment loss for XianyangOSR for 2016. We were not aware of similar impairment loss booked in 2015.
　　Decrease in interest income/exchange loss from RMB depreciationThose two reasons are self-evident as the interest rate decreased and RMBdepreciated while the company’s reporting currency is in HKD.
　　We recently upgraded China Travel to BUY
　　We believe after the profit warning, the worst seems to be over and the marketshould look forward to its 2017 operations because the company issued a totalof 170 million options to its qualified employees in 2016 （152 million inSeptember, 2016 and 17.5 million shares in December, 2016, both at exerciseprice of HKD2.3/shr）。 We believe management should have more incentive toturn around its business in 2017E. We therefore reiterate BUY for China TravelHK.