China domestic tourism：2H Buy list: valuation, growth and catalyst; our top-pick-CITS

Deutsche Bank Markets Research Asia China Consumer Hotels / Leisure / Gaming Industry China domestic tourism Date 3 August 2016 Industry Update 2H Buy list: valuation, growth and catalyst; our top-pick-CITS Our top pick is CITS on valuation, growth recovery and catalyst from BJ airport ________________________________________________________________________________________________________________ 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) 057/04/2016. Tallan Zhou Research Analyst (+852 ) 2203 6464 tallan.zhou@db.com Karen Tang Research Analyst (+852 ) 2203 6141 karen.tang@db.com Top picks CITS (601888.SS),CNY44.57 Buy Source: Deutsche Bank Companies Featured CITS (601888.SS),CNY44.57 Buy 2015A 2016E 2017E P/E (x) 26.3 24.6 22.0 EV/EBITDA (x) 14.3 13.5 11.8 Price/book (x) 4.5 3.5 3.1 China CYTS Tours (600138.SS),CNY20.58 Buy 2015A 2016E 2017E P/E (x) 61.3 32.8 26.6 EV/EBITDA (x) 19.5 14.2 12.7 Price/book (x) 3.6 2.9 2.7 Songcheng Performance (300144.SZ),CNY23.12 Buy 2015A 2016E 2017E P/E (x) 106.1 36.4 28.7 EV/EBITDA (x) 66.1 23.2 18.4 Price/book (x) 7.3 5.2 4.5 Huangshan (600054.SS),CNY16.30 Buy 2015A 2016E 2017E P/E (x) 49.3 32.7 28.8 EV/EBITDA (x) 22.8 16.4 14.5 Price/book (x) 5.9 3.7 3.4 Source: Deutsche Bank For 2H16, we see CITS, the only listed duty-free player in China, as a high conviction stock. For the short term, we believe Haitang Bay store’s growth should recover due to: 1) resumption of rebates to travel agencies; and 2) government incentives to reward travel agencies to drive group tourists to stores. Longer term, we estimate Haitang Bay will achieve RMB6bn duty free sales, a CAGR of 10% over 2016-19E. Meanwhile, with the new Beijing Airport about to open bidding for duty-free store operators, this could be a catalyst for CITS in 2017. CYTS, the only SOE that has earnings growth potential We like CYTS for its earnings growth potential in Wuzhen Town and Gubei Town. We believe CYTS has the highest tourist site operation level in China. Wuzhen attracted 7.95m visitors in 2015, and we believe the town can achieve 18% growth to 9.43m visitors in 2016. In the long term, CYTS should continue to leverage its SOE background to win more land/ancient town resources with its veteran team in charge of project operations. The stock is trading at 26.3x 2017E PER, which is attractive, in our view. Huangshan: a defensive player We believe Huangshan will continue to benefit from the structural volume growth brought by improved transportation. In addition, we like the company for: 1) its high-quality off-balance sheet assets (i.e. the Huangshan mountains); 2) the strong bargaining power of its hotels on the mountain range; and 3) its long-term growth potential from its utilization of surrounding attraction sites. In addition, as costs incurred by Huangshan Tourism, such as operating expense and D&A of cable cars and hotels, are relatively fixed and do not grow with visitor volume, the company generally enjoys a higher revenue and net profit growth than the underlying volume growth. Huangshan, with net cash of RMB1.25bn, is trading at 28.3x 2017E earnings. Songcheng Performance key word: high growth We expect Songcheng to deliver 70% core earnings growth in 1H16 thanks to contributions from Six Room (which was consolidated in 2H15). We believe Songcheng’s offline performance show revenue will grow 37.5% to RMB788m in 1H16. With additional new pipelines under construction (such as the Nixiang Tanhe ancient town, Shanghai and Li River), we expect Songcheng to maintain its high growth in the medium term. The stock trades at 29x 2017E earnings, representing a PEG of 1.07x. Valuation and risks We derive our target prices using a DCF valuation, factoring in the long-term growth outlook of China's domestic tourism industry. Key downside risks: 1) a slowdown in the tourism industry; 2) rising competition from international destinations with relaxing visa policies; 3) natural disasters at the tourism sites; and 4) delays in infrastructure development. Distributed on: 08/03/2016 17:21:57GMT 3 August 2016 Hotels / Leisure / Gaming China domestic tourism Page 2 Deutsche Bank AG/Hong Kong 1H16 earnings preview Strong 1H16 earnings growth China domestic traffic grew 10.5% yoy in 1H16 China’s domestic tourism growth remained strong in 1H16: 10.5% yoy growth from the domestic volume side (total traffic was 2.24bn). Total domestic revenue growt