Where did third-quarter operations deteriorate?

  • Revenue fell 33% year on year in the third quarter of 2026, a steeper decline than the 19% drop in the second quarter and deeper than Goldman Sachs expected. Management attributed the decline in visitor numbers to unfavorable weather from July to August.
  • The overall average selling price fell by a single-digit percentage year on year. The Hangzhou project fell 10% amid renovation and upgrades, while the Jiuzhaigou, Guilin and Zhangjiajie projects achieved modest price increases.
  • Third-quarter net profit was 192 million yuan, or 212 million yuan excluding one-off items, down 46% year on year. Adjusted net profit for the first nine months was 539 million yuan, down 29% year on year and reaching only 74% of Goldman Sachs’ original full-year forecast, compared with more than 90% typically reached by the same point in previous years.

Why did falling revenue amplify pressure on profit?

  • Performance personnel costs remained relatively stable, making this expense harder to spread over revenue as revenue fell. Third-quarter gross margin declined to 60.5%, down 11 percentage points year on year, a larger decline than the 8.9 percentage-point drop in the second quarter.
  • General and administrative expenses still rose 12% year on year, adding to operating leverage pressure: third-quarter earnings before interest and taxes fell 50% year on year to 211 million yuan, and the margin fell 14.4 percentage points to 42.1%.
  • The funding position remained relatively sound: third-quarter capital expenditure was 39 million yuan, and net cash at quarter-end was 1.7 billion yuan, above 1.5 billion yuan at the end of the second quarter.

Can project updates bring improvement?

  • The Hangzhou project upgrade is scheduled to begin at the end of 2026 and continue in phases through 2028, with plans to add 7 kilometers of touring routes and cultural experiences. Management said the Qingdao project, which opened in early July, had shown encouraging operating performance.
  • Construction has just begun on the asset-light Donghai Eternal Love project, which is scheduled for completion in May 2028; the company received 20 million yuan in design fees in the third quarter. The Thailand project has no timetable yet, and management acknowledged that it may be delayed from the original plan.
  • Management remains cautious about next year, expecting fierce competition and weak consumption to continue weighing on average selling prices. The company plans to attract visitors by expanding its content, themed events and promotions for different groups.

Why does Goldman Sachs maintain its Sell rating?

  • Following weaker-than-expected operating performance during the year, Goldman Sachs cut its adjusted net profit forecasts for 2026 through 2028 by 9% to 17% and lowered its 12-month price target from 6.2 yuan to 6 yuan.
  • Goldman Sachs sees continuing challenges in the widespread replication of the company’s model, product homogeneity, and consumers’ shift toward digital cultural consumption such as short videos and mobile games. Although more asset-light agreements have been signed in recent years, the pace of new contract signings remains slow.
  • The bank considers the company’s valuation high relative to tourism peers, with its shares trading at around 24 times forecast 2026 earnings, and therefore maintains a Sell rating relative to the tourism companies it covers. Goldman Sachs lists successful upgrades to existing projects, the signing of new asset-heavy projects, and better-than-expected macroeconomic conditions and domestic tourism demand as potential upside factors.