Weak FY18 results mainly due to new parks kick-off
Although revenue of Haichang grew 7% yoy to RMB1,790mn in FY18,net profit slumped from RMB280mn to RMB40mn because i） SG&Aexpenses increased by RMB309mn, mainly due to various kick-offcosts for Shanghai and Sanya projects, such as trial operation andwarm up promotion; ii） finance costs up by HK$124mn, as net debtincreased significantly from RMB3.4bn by end FY17 to RMB6.0bn byend FY18 to fulfill CAPEX for new parks; and iii） RMB59mn deferredtax incurred in FY18 for Land Appreciation Tax related to revaluationgain of Shanghai park. These negative factors were partially offset by~RMB230mn subsidies from Shanghai government.
Decent visitation for Shanghai Park YTD
Shanghai Haichang Ocean Park has commenced operation on 16Nov 2018. Its early operation is encouraging with ~RMB65mn and~RMB190mn revenue in 4Q18 and 1Q19 respectively. There was~630k visitors in 1Q19, which represented >15% of the Company’sfull year target of 4mn. Management suggested that based onhistorical figures of its other parks, Q1 contribute 11% of annualvisitation on average. Shanghai Park has extended opening hour andlaunch one of its core attractions （water rafting） recently, which islikely to further improve its popularity.
Revenue per visitor stood at ~RMB310 in 1Q19, of which~65%/23%/12% came from ticket, F&B and hotel respectively. Theprevious 10% ticket discount has been cancelled in April, while trafficis not affected by such adjustment according to management. TheCompany target to achieve ~RMB350 revenue per visitor in FY19E.
Sanya project has also commenced operation in early 2019
Sanya Haichang Fantasy Town has also commenced operation on 20Jan 2019. However, due to the uncertain subsidy payment schedulefrom Sanya government and tight cash flow of the Company, some ofthe key attractions, such as the marine show, are not in place yet.
Management expect Sanya project to achieve RMB200-250mnrevenue in FY19E, while attractiveness and profitability would furtherimprove in FY20E amid the completion of remaining attractions.
Gearing to peak in 1H19, maintain BUY
While we understand that investors are concerned about the highgearing （net gearing at 135% as of end FY18）， we expect net gearingratio would peak in 1H19 and improve afterward given i） lowerCAPEX （~RMB1bn and ~RMB600mn in FY19E and FY20E versusRMB4.4bn in total during FY17-18）， ii） contribution from Shanghaiand Sanya projects, and iii） more focus on asset light projects in thefuture, such as consultancy services, brand licensing and mini indoorpark in shopping malls. New target price at HK$2.10, which translateto 8.5X FY20E EV/EBITDA, 10% discount to international peers.