Travelling well - initiating with a Buy

Deutsche Bank Markets Research Rating Buy Asia China Consumer Hotels / Leisure / Gaming Company China Travel (HK) Date 19 June 2015 Initiation of Coverage Travelling well - initiating with a Buy Reuters Bloomberg Exchange Ticker 0308.HK 308 HK HKG 0308 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (HKDm) 4,359.9 4,475.1 4,807.4 5,264.1 5,745.8 DB EPS FD(HKD) 0.11 0.14 0.16 0.18 0.19 DB EPS growth (%) 9.5 22.6 14.4 13.3 9.8 PER (x) 14.0 14.2 21.9 19.3 17.6 DPS (net) (HKD) 0.06 0.12 0.09 0.06 0.06 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close On the right track to benefit from tourism booming in China ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 18 Jun 2015 (HKD) 3.40 Price target - 12mth (HKD) 4.80 52-week range (HKD) 4.03 - 1.51 HANG SENG 13,415 Tallan Zhou Research Analyst (+852) 2203 6464 tallan.zhou@db.com Karen Tang Research Analyst (+852) 2203 6141 karen.tang@db.com Price/price relative 1.02.03.04.05.06/1312/136/1412/14China Travel (HK)HANG SENG (Rebased) Performance (%) 1m 3m 12m Absolute 3.0 47.2 119.4 HANG SENG -3.7 12.0 28.4 Source: Deutsche Bank We initiate coverage on China Travel with a Buy and a target price of HKD4.8, implying upside potential of 40%. China Travel is our top pick in the tourism site segment on the back of: 1) sustainable core earnings growth in its core business (14% CAGR in 2014-17E); 2) SOE reform; 3) a strong balance sheet after disposal of non-core assets; and 4) attractive valuation vs. A share peers. Active balance sheet management to improve profitability As an SOE, China Travel has been bold in restructuring its assets and focusing on a higher ROE. So far, it has disposed all of Mangocity.com and Metropark Service Apartment Shanghai in 2014, for a cash gain of HKD838m. It has also confirmed plans to dispose of its power plant for RMB510m with HKD480m disposal gain, and hopes to sell its Xianyang Ocean Spring Resort (OSR), a loss-making project, in 2015. We believe these moves will not only increase its core ROE (from 5.1% in 2014 to 6.3% by 2017), but will also help it accumulate sufficient cash for future acquisitions, including new tourist sites. Connecting the business upstream and downstream China Travel’s strategic framework is very clear. It plans to capitalize on growing domestic travel through investment in both services and physical infrastructure. Its travel agency (including visa issuance) and bus operations currently provide stable earnings. Future acquisitions of tourist sites will not only contribute new earnings but will also support its agency business. Management has guided that it plans to add 1-3 tourist sites every year. China Travel has a good acquisition track record for tourist sites: prioritizing cheap valuations and high net margins, e.g. Mount Songshan’s acquisition price is RMB69m for net profit of RMB17m (at PER of only 4x). Valuation and risks We derive our HKD4.8 price target on SOTP with a 10% group discount, on 1) travel agency business at 15x PER, 2) tourist attractions at 40x PER, 3) hotels at 25x PER, 4) transportation at 15x PER, 5) real estate project based on NAV (40% discount). The stock is trading at a 12m forward PER of 21x, much lower than the sector average of 56x. Key risks: 1) acquisition risk; 2) failure/delay in disposal of non-core assets; 3) uncertainty in new project performance. 19 June 2015 Hotels / Leisure / Gaming China Travel (HK) Page 2 Deutsche Bank AG/Hong Kong Model updated:18 June 2015 Running the numbers Asia China Hotels / Leisure / Gaming China Travel (HK) Reuters: 0308.HK Bloomberg: 308 HK Buy Price (18 Jun 15) HKD 3.40 Target Price HKD 4.80 52 Week range HKD 1.51 - 4.03 Market Cap (m) HKDm 19,135 USDm 2,468 Company Profile China Travel Int Inv HK operates both natural sites and artificial sites in China. It operates six business segments: tourist attraction, travel service, hotel, complimented by passenger transportation, golf club, performance show. Price Performance 1.02.03.04.05.0Jun 13