Record bets against Hotel Shilla Co. shares have only made analysts more bullish on the South Korean operator of duty-free shops.

Short interest in the Seoul-based affiliate of Samsung Group climbed to 5.1 percent of outstanding shares on Nov. 27, the highest level since at least 2006, according to data compiled by Markit and Bloomberg. The stock has lost 34 percent from its August high, the worst performance among Korea’s 100 biggest companies by market value, while the benchmark KOSPI index slipped 4.6 percent.

Wagers against Shilla, which gets about 90 percent of its revenue from eight tax-free outlets, swelled after the stock’s valuation premium over the KOSPI rose to an all-time high and traders speculated the government will introduce more competition. Brokerages including CLSA Ltd. are convinced the shares will rally amid a surge in Chinese tourists to Asia’s fourth-largest economy, with the average price target suggesting a record 58 percent advance over the next 12 months.

“Short-selling has become the major driver of the share performance since August,” Brian Lee, a Seoul-based analyst at CLSA, said by phone on Nov. 27. “Then all uncertainties about new duty-free shops are resolved and the company reports strong fourth-quarter earnings, the stock will rebound strongly.”

Short sellers may buy back shares to unwind their bets as the firm’s profit beats market expectations, Lee wrote in a Nov. 23 report. The company will probably maintain its stores at Korea’s Incheon airport after the government started accepting bids for duty-free operating rights at the location, he wrote, adding that Shilla can weather competition from smaller new entrants in Seoul.


Samsung link

“Even in the worst case, where Shilla’s shop space declines in Incheon and new operators are allowed in Seoul City, that would deter Shilla’s long-term growth,” Sung June Won, an analyst at Shinhan Investment Corp. in Seoul, said by phone on Nov. 28. “Investors will begin to buy the stock at a comfortable level after the big retreat from the August peak.”

Shilla, run by Samsung chairman Lee Kun Hee’s daughter Lee Boo Jin, said in an emailed reply to questions from Bloomberg News that it will “aggressively” pursue operating rights at Incheon in the auction. The company declined to comment on its share price and short interest.

Even after its retreat, Shilla is valued at a 154 percent premium over the KOSPI. The stock trades for 34 times estimated earnings, versus 13 times for the benchmark gauge, according to data compiled by Bloomberg.


Regulatory risk

Shilla still faces the risk that South Korea’s government will use duty-free licenses to support smaller companies at the expense of businesses with links to conglomerates, Regina Hahm, an analyst at Daewoo Securities Co., said in a Nov. 27 phone interview.

President Park Geun Hye won the 2012 election by promising to pursue “economic democratization” through policies designed to reduce the nation’s reliance on family-run conglomerates, known as chaebol, and bolster small- and mid-sized businesses.

Even if the government allows new entrants into the duty-free business, Shilla’s experience in the industry will give it a competitive advantage and its long-term earnings prospects will get support from an increasing number of Chinese tourists in Korea, according to Lee Jin Woo, a money manager at KTB Asset Management Co., which oversees about $8.5 billion in assets. The yuan has strengthened more than 4 percent against the won this year, increasing the buying power of Chinese tourists in Korea.

Park announced a package of measures, including electronic visa applications for Chinese visitors and an increase in the number of translators at popular attractions, to boost tourism in February.


Tourism boom

The number of Chinese visitors to South Korea more than tripled to 4.3 million in the five years through 2013, according to Tourism Ministry data. The government plans to attract 6 million people from the world’s most-populous nation next year.

Shilla will probably report fourth-quarter operating profit of 33.3 billion won ($30 million), according to an average of seven analyst estimates compiled by Bloomberg. That compares with 5.8 billion won in the final three months of 2013. Annual earnings for 2015 may reach 249.7 billion won, a 67 percent jump from this year, the projections show.

“Then all the noise and uncertainties subdue, the stock will rebound and there’s no doubt about the company’s long-term growth,” Lee said. (Bloomberg)