[CICC] Fosun Travel Service (01992.hk): There is still uncertainty about epidemic prevention and travel control; optimistic about long-term recovery and rebound (target price: HK$13.50)

Due to recent changes and repeated effects of the coronavirus, there is still uncertainty about overseas and domestic travel regulations, but we are optimistic about Club Med's production capacity recovery, expansion and upgrading, and the growth prospects of Atlantis Sanya in the long term.

1. Pay attention to the uncertainty of travel control under the coronavirus mutation.Affected by the Omicron variant of the coronavirus since late November, Japan suspended the entry of new foreigners from all countries and regions from 00:00 on November 30. The South Korean government plans to tighten domestic epidemic prevention measures, the United States, France, the United Kingdom, Canada and other countries strengthened entry prevention measures, and Australia's reopening of international borders was delayed from December 1 to December 15. Hong Kong has been tightening boarding and quarantine requirements for people arriving in Hong Kong from regions with new cases of Omicron variant infection, while continuing to promote customs clearance preparations between the two places: the Hong Kong Health Code (“Hong Kong Health Code”) opened online applications at 9:00 on December 10; on December 14, relevant government teams from the Hong Kong Special Administrative Region went to Shenzhen to hold a matchmaking meeting with representatives of Guangdong Province to discuss customs clearance arrangements.

2. We are optimistic about Club Med's production capacity recovery and expansion and upgrading for a long time.We expect production capacity to increase in 4Q21 compared to 71.9% month-on-month in 3Q21. The remaining gap is mainly due to the fact that some Asia-Pacific resorts outside of China are still closed due to the local epidemic and the fact that major customer destinations such as China, Japan, and South Korea have not yet liberalized outbound travel restrictions. The company plans that with the gradual liberalization of entry and exit restrictions from Northeast Asian countries, some Asia-Pacific resorts are expected to restart one after another in 2Q22. The company plans to open 16 new Club Med resorts between 2021 and 2023. Since this year, resorts in Seychelles, Lijiang and Quebec have opened, and Changbaishan Resort is scheduled to open in winter. Furthermore, with some low-star resort leases expiring, opening new high-star resorts and upgrading stock capacity (the company plans to complete the renovation of 12 existing resorts by 1H24), we expect average bed prices to continue to rise.

3. Under domestic epidemic prevention and control, the peak tourist season in Hainan may be under pressure; Atlantis's performance is expected to continue to outperform the industry.As of 15:00 on December 15, there were 7 high-risk regions and 47 medium-risk areas in China, covering Inner Mongolia, Heilongjiang, Shanghai, Zhejiang, Guangdong, and Shaanxi. On December 8, the Shanghai Health Commission proposed “not leaving Shanghai unnecessarily” during the Spring Festival on New Year's Day; at the same time, we expect that under domestic travel regulations during the Winter Olympics, Sanya, Hainan, as a national cross-provincial travel destination, will be under pressure from the end of the year until the peak tourist season of 1Q22. At the same time, we believe that Atlantis's business performance as a landmark holiday product in Sanya is expected to continue to outperform its peers, and there is still plenty of room for improvement in terms of operating and non-housing income over the long term.

Taking into account the uncertainty of travel regulations under repeated pandemics, expenses related to the initial opening of the Lijiang project, and new business development costs, we lowered our 2021 profit forecast from a net loss of 2.3 billion yuan to a net loss of 2.47 billion yuan, and the profit forecast for 2022 was reduced by 42% from 620 million yuan to 360 million yuan. The current share price corresponds to 7x 2022 EV/EBITDA. Based on optimism about the medium- to long-term Club Med recovery and the growth prospects of Atlantis Sanya, the industry rating was maintained, and the target price was revised downward by 4% to HK$13.5, corresponding to 8 times the 2022 EV/EBITDA, with 47% upside compared to the current stock price.