Action
We upgrade China Travel from HOLD to BUY, and raise our targetprice from HK$2.64 to HK$3.88.
What’s changed?
New CEO, new strategy. Since the new CEO came on board in2016, new business targets, including ROE targets, core profitgrowth rates and management incentive schemes have beenadopted. We think that these measures will help seniormanagement prepare the company for further development.
Hidden value of the company’s property holdings in HKexpected to be revealed. We estimate the potential value of thecompany’s property holdings to be close to HK$15bn. Onecommercial building located in Mong Kok is on the potentialasset disposal list. We expect a special cash dividend to be paidif the company sells these assets.
We also expect the company’s core profit to be pumped up byrecovery of hotel business in HK and Macau from a low base,faster domestic tourist project development, new real estateprojects in tourist areas in Zhuhai and Anji, and implementationof operating cost controls.
How do we differ from the market We think that more incentivizedmanagement will lead to higher earnings growthPotential catalysts: Announcement of asset sales.
Financials and valuation
In light of the new strategy and developments, raise 2017 and 2018core profit forecast by 46.6% and 57.6% to HK$764mn andHK$907mn. Raise TP by 47% to HK$3.88, based on SOTP valuation.
Risks
SOE reform more limited than expected.