Growth in outbound wholesale has been fully valued; initiating with Hold

Deutsche Bank Markets Research Rating Hold Asia China Consumer Hotels / Leisure / Gaming Company UTour Travel Date 29 September 2016 Initiation of Coverage Growth in outbound wholesale has been fully valued; initiating with Hold Reuters Bloomberg Exchange Ticker 002707.SZ 002707 CS SHZ 002707 Forecasts And Ratios Year End Oct 31 2014A 2015A 2016E 2017E 2018E Sales (CNYm) 4,217.0 8,370.2 12,169.1 16,131.1 19,736.4 EBITDA (CNYm) 129.0 279.4 479.6 695.5 826.2 Reported NPAT (CNYm) 108.7 186.7 278.3 385.5 446.6 Reported EPS FD(CNY) 0.46 0.22 0.33 0.46 0.53 DB EPS FD(CNY) 0.45 0.22 0.33 0.46 0.53 DB EPS growth (%) – -51.3 52.7 38.3 15.8 PER (x) 15.3 80.6 57.8 41.8 36.1 EV/EBITDA (x) 9.4 50.6 20.9 14.2 11.6 DPS (net) (CNY) 0.03 0.05 0.07 0.10 0.12 Yield (net) (%) 0.5 0.3 0.4 0.5 0.6 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 UTour's growth may be constrained by its distribution channels ________________________________________________________________________________________________________________ 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. Price at 28 Sep 2016 (CNY) 19.17 Price target - 12mth (CNY) 20.00 52-week range (CNY) 27.02 - 18.70 HANG SENG INDEX 23,572 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 01020304050609/143/159/153/16UTour TravelHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -4.0 -8.7 -4.4 HANG SENG INDEX 2.9 16.9 11.3 Source: Deutsche Bank The rising number of Chinese outbound tourists supports a robust outbound travel market. UTour, as one of the largest outbound travel service providers, has benefited from the fast-growing outbound travel market. However, we believe its high reliance on the wholesale business may constrict its margins, and weaker demand for European travel will hamper its revenue growth. UTour does not have the rich tourism resources of Caissa in the destination countries and is trading at higher valuations. Therefore, we initiate coverage with Hold. Acquisitions bring scale effects We believe the acquisition of HYTours offers good synergy in its outbound market, especially in the European market. We expect its market share in Europe to approach 50% after the acquisition, making UTour the largest outbound travel service provider in China. As a result, we believe that after consolidating outbound wholesale resources, the company’s market share will continue to expand and lift its bargaining power in the upstream supply chain. UTour exposed to the risk of EU market contraction Demand for EU travel shrank after the EU launched a stricter visa application process. Growth in Chinese travelers to the EU dropped to 8.8% in 1Q16 from 39% in 4Q15. We estimate the European business contributes c50% of total revenue to UTour; hence its revenue growth would be hampered if travelers’ reluctance to go to the EU continues. We expect UTour to continue upstream acquisitions to expand its sourcing channels in travel destinations. Valuation and risks UTour is trading at 42x 2017E PER, higher than Caissa (37x). However, UTour is considered an outbound wholesaler. Our DCF-based valuation is RMB20, implying 1.3x 2017E PEG, which is fully valued. Key upside risks: 1) faster-than-expected growth of Chinese outbound travelers, and 2) relaxation of visa policy in destination countries. Key downside risks: 1) slowdown of outbound travel market, 2) increasing competition, and 3) depreciation of the RMB. Distributed on: 28/09/2016 17:33:37 GMT 29 September 2016 Hotels / Leisure / Gaming UTour Travel Page 2 Deutsche Bank AG/Hong Kong Model updated:28 September 2016 Running the numbers Asia China Hotels / Leisure / Gaming UTour Travel Reuters: 002707.SZ Bloomberg: 002707 CH Hold Price (28 Sep 16) CNY 19.17 Target Price CNY 20.00 52 Week range CNY 18.70 - 27.02 Market Cap (m) CNYm 10,735 USDm 1,610 Company Profile Utour Group offers travel services. The company provides overseas, domestic and other travel related services to customers throughout China. Price Performance 0102030405060Sep 14Dec 14Mar 15Jun 15Sep 15Dec 15Mar 16Jun 16UTour TravelHANG SENG INDEX (Rebased)