We again lift our target price after raising forecasts and rolling over to 2018
We lift our target price to HKD3.1 from HKD2.7 as we raise our 2017/18 earningsforecasts by 11%/9% and roll over our valuation to 2018 while we maintain ourvaluation multiple largely unchanged. We saw a clear fundamental recovery trendin the company's 1H17 results （cost cutting and robust revenue/earnings growthfrom travel/hotel segments） thanks to its new management and incentive plan.
We believe such momentum will continue in 2H17 and 2018.
Incentive plan effective in driving up earnings growth, as reflected in 1H report
China Travel issued c.170m share options at HKD2.3/share in 2016. Managementsaid that three key indicators must be met for middle-senior management to beeligible to exercise the options: 1） bottom-line growth of more than 15% yoy; 2）ROE above 6.5%; 3） the share price should outperform a few indexes （e.g., HangSeng Index or Hang Seng China Index）。 We understand from the Chairman thata total of 230 senior employees covering all China Travel HK subsidiaries （OceanSpring Resort, World of the Window, Splendid China, etc.） are in the option poolfor incentives.
Our previous upgrading thesis will continue to work for hotel valuation
China Travel's hotel valuation alone is c.USD1.53bn if we assign USD1m per roomfor its HK hotels and USD0.5m per room for the Macau hotel; a conservativevaluation for its hotels alone would be USD1.5bn. With net cash of c.RMB4bn,China Travel's other segments are basically free for investors. We believe there isstill upside potential in the per room valuation for the HK-based hotels.
Valuation and risks
We base our target price on SOTP using a 10% group discount, with 1） the travelagency business at 10x PER; 2） tourist attractions at 20x PER; 3） hotels at 15xPER; 4） transportation at 10x PER; and 5） real-estate projects based on NAV （40%discount）。 Risks: 1） acquisition risk; 2） failure or delay of disposal of non-coreassets; and 3） uncertainty over the performance of new projects.