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Spotlight on the hotel business

3Q25 preview: Travel retail losses likely to continue

For 3Q25, we expect Hotel Shilla to report below-consensus results, with revenue of W1.07tr (+5% YoY) and operating profit of W17.5bn (turning to profit YoY). Airport duty-free operations likely remained in the red, but improved margins at downtown stores and strong seasonality for the hotel/leisure business likely drove QoQ growth in overall operating profit.

For the travel retail business, we look for revenue of W883.3bn (+5% YoY) and an operating loss of W5.5bn (remaining in the red). Downtown stores likely generated operating profit of W16.7bn (OP margin of 4.5%), remaining profitable for the fourth consecutive quarter. However, domestic airport operations likely incurred losses of over W10bn, and international airport operations also likely saw losses of around W10bn. Of note, airport rent expenses appear to have risen due to increased traffic during the summer travel season. At downtown stores, there were no unusual commission-related issues, and margins likely improved as the proportion of sales linked to Chinese resellers (daigou) declined further.

For the hotel/leisure division, we estimate revenue at W182.3bn (+6% YoY) and operating profit at W23bn (+6% YoY; OP margin of 12.6%). Revenue growth likely remained solid at The Shilla Seoul (+10% YoY) and the Shilla Stay brand (+9% YoY), while The Shilla Jeju likely saw a narrower decline (-3% YoY). The Jeju property has been in the red since 3Q24, weighing on overall hotel profitability, but we expect margin pressure to ease as its revenue decline slows.

Travel retail unlikely to deteriorate further; value of hotels to come into focus

In 1H25, downtown stores posted operating profit of over W30bn, but sharp losses at domestic and international airport operations (around W30bn and W20bn, respectively) resulted in an overall travel retail loss of W16.3bn. As a result, consolidated operating profit in 1H25 was a mere W6.3bn despite solid hotel profits (W18.6bn). Looking ahead, the exit from the DF1 zone at Incheon International Airport is likely to eliminate most of the domestic airport losses from 2Q26 onward, raising the likelihood of a turnaround in travel retail operations.

As the travel retail unit moves back toward profitability, the value of the hotel business is likely to come into focus. Hotel Shilla operates around 5,700 hotel rooms nationwide, giving it a clear scale advantage over competitors such as GS P&L (3,082). It continues to add one to two locations annually, primarily through an asset-light model (focused on management contracts) that allows it to grow its network without heavy capex. We value the hotel business at around W2tr based on existing room inventory alone, with further upside likely due to its flexible expansion model and stable earnings structure. With an earnings turnaround approaching, we reiterate our Buy rating.