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Long: China Travel (Hong Kong) Limited

China Travel Service (Hong Kong) Limited (CTSHK) (SEHK:308) was established in 1928 and is one of the largest travel companies in Hong Kong with 40 branch offices. CTSHK has four main business segments:

  • Tourist attractions operations (HK$1.85 billion revenue, HK$195 million segment profit). Operates theme parks in Shenzhen (51% interests in Window of the World and Splendid China), natural and scenic spots across China (Shapotou - 51%, Shaolin - 51%, Jigongshan - 51%) as well as associated cable car operations, and leisure resorts (Zhuhai Ocean Spring Resort, Xianyang Ocean Spring Resort, Chengdu Huashuiwan Sakura Hotel as well as the development of the Anji Linfeng Mountain resort).
  • Travel agency, travel documents and related operations (HK$1.36 billion revenue, HK$188 million segment profit). CTSHK has a monopoly for travel permit application for Hong Kong and Taiwanese residents traveling to mainland China. The company disposed of its online business, Mangocity.com in June 2014 for RMB602 million, due to non-performance of the asset. CTSHK recognized a gain of HK$420 million for the disposal.
  • Hotel operations (HK$763 million revenue, HK$112 million segment profit). The company operates eight city hotels (four in Hong Kong, one in Macau and three in mainland China). The company disposed Metropark Service Apartment Shanghai at the end of 2014, recognizing a one-time gain of HK$418 million.
  • Passenger transportation operations (HK$296 million revenue, HK$151 million segment profit). Operates shuttle bus services (as well as airport transfer services) between Hong Kong and cities in Southern China, predominantly Shenzhen.

The company also operated CTS Tycoon (Shenzhen) Golf Club (HK$109 million revenue, HK$3 million loss), which was closed by the Shenzhen government in May 2015 as the club resided within the water protection zone.

China Travel Services (Holdings) Hong Kong Limited (CTS Holdings) owns 58.8% of CTSHK, while Guoxin International Investment owns 20.1%. CTS Holdings is a wholly-owned subsidiary of China National Travel Service (NYSE:HK) Group, which is currently undergoing a merger with CITS Group Corporation (owner of China International Travel Services (SHA:601888), a leading travel agency in China and sole concession owner for duty-free shops in China).

PP&E, which largely comprised of hotel properties, land and buildings, scenic spots establishments and construction-in-progress, was HK$7.9 billion (HK$14.1 billion cost minus HK$6.2 billion accumulated depreciation). Given the company's assets are relatively matured, we believe that the company's PP&E should have appreciated above its cost. Adding back accumulated depreciation (HK$6.2 billion) and deducting goodwill and intangibles (HK$1.5 billion), the company's tangible book value is estimated at HK$20.1 billion, compared to a market value of HK$13.1 billion (0.65 P/TBV). The discount of market cap to tangible book value provides a rather wide margin of safety.

CTSHK's shares are currently trading at HK$2.23 per share (7.4% above 52-week low), representing 8.7x trailing EBITDA and 4.8% dividend yield. CTSHK has a very strong balance sheet - as of 31 Dec 2015, CTSHK had HK$3.7 billion of cash and equivalent and HK$828 million of debt. CTSHK has historically generated significant cash flows from operations (above HK$900 million). In 2015, the company paid HK$525 million in dividends and spent HK$314 million in share repurchase.

Buy CTSHK at HK$2.31 per share, with a stop-loss of HK$2.10 per share.

Catalyst

  • Streamlining of core travel business - disposal of non-core (Metropark Service Apartment Shanghai and power generation operations, as well as the discontinuation of the unprofitable Tycoon Golf Club) and non-performing assets (MangoCity.com) - can potentially unlock value as the company focus on travel-related businesses
  • Combination of the parent companies of CTSHK and China International Travel Services (27.6x P/E) could potentially result in value accretive reorganization

Disclosure: I am/we are long CTVIF.