CTG DUTY FREE(601888)2022 EARNINGS PREVIEW：GROWTH LOGIC TO RETURN AFTER RECOVERY

　　According to the Company’s preliminary results, its 4Q22 earnings missed expectations as a result of tighter Covid policies followed by nationwide infections during 4Q22 as well as routine year-end expense accruals. With the management of Covid-19 being downgraded from Category A to Category B in 2023 after classifying it as a Class B infection disease, a clear recovery is in store for Hainan, which is a national first-tier tourism destination. The total sales of Hainan’s offshore duty-free market during the 2023 Chinese New Year (CNY) holiday grew by over 20% YoY, achieving a good start to 2023. Our tracking shows that the Company’s YTD revenue from duty-free stores has shown significant YoY and MoM growth. With the return of offline consumer flows, its sales mix of online vs offline channels will gradually normalize. Coupled with the optimization of the overall market price system, its profit margin may rebound significantly.
　　Meanwhile, the recovery of outbound tourists might drive the rollout of downtown duty-free store policies. We believe that the recovery process will persist in 2023 and the Company’s profitability will rebound more significantly along with a rebound in sales. The general logic of benefitting from consumption reshoring remains intact, and the growth logic will return after the recovery materializes. We reiterate the “BUY” rating.
　　 Significant Covid disruptions in 4Q22 led to an earnings miss.
　　CTG Duty Free released the preliminary results for 2022, achieving revenue of Rmb54.463bn (-19.5% YoY), attributable net profit (ANP) of Rmb5.025bn (-47.9% YoY), and ex-one-off net profit of Rmb4.897bn (-48.6% YoY). If we exclude the income tax rebate and the rent concession recognized in 2021 and 2022, the 2022 ANP would decrease by 44% YoY. We thus calculate that 4Q22 revenue would be Rmb15.099bn (-16.9% YoY) and the corresponding 4Q22 ANP/ex-one-off net profit would be Rmb397mn/313mn (-65.9%/-72.6% YoY), respectively, which fell below expectations. On the one hand, the peak-season sales data were weaker than previously expected due to the tightening of Covid control policies during Oct-Nov 2022 as well as nationwide infections in Dec 2022. On the other hand, the share of online sales was passively lifted under the circumstance of reduced offline traffic, which led to a lower profit margin. Meanwhile, bonus accruals and the recognition of inventory impairments usually occur in 4Q, and the opening of the Haikou cdf mall in 4Q22 might have shored up expenses, resulting in greater earnings volatility against the backdrop of undermined operating profit.
　　Foot traffic was weak in 4Q22, leading to a higher share of online sales.
　　According to Haikou Customs data, offshore duty-free sales in Oct-Dec 2022 were Rmb2.31bn/2.78bn/2.65bn (-53.7%/-25.0%/-49.4% YoY), respectively.
　　Hainan’s general passenger flow for 4Q22 was severely affected by Covid-19.
　　The number of tourist arrivals to Hainan fell by 47.2%/28.0%/19.9% YoY in Oct-Dec 2022, respectively, while the passenger throughput of the Sanya airport fell by 65.9%/35.7%/24.9% YoY. Benefitting from its attractiveness as a first-tier tourist destination, Hainan saw its passenger flow rebounding rapidly after the ease of Covid-control policies in Dec 2022, albeit still affected by the first round of nationwide infections. The Company’s net profit margin (NPM)
　　for 4Q22 reached a recent low of 2.6% (vs. 6.4%/15.3%/12.6%/5.9% for 4Q21/1Q22/2Q22/3Q22, respectively), the core reason of which is a higher share of online sales resulting from the lack of general passenger flow in our view. We estimate that online sales of cdf Hainan may account for more than 30% in Oct-Dec 2022, while online sales may account for more than 50% of the Company’s total sales throughout 2022.
　　The CNY holiday marked a good start to 2023, warranting a rise in revenue and profitability alike in 1Q23.
　　Stepping into 2023, Hainan’s passenger flow recovery has been driving the rapid growth of the offshore duty-free market. The throughput of three major airports in Hainan during the 2023 CNY holiday recovered to 90.9% of the level in the same period of 2019, and the total number of tourists received by Hainan increased by 9.8% compared to the 2019 CNY holiday. According to data from the Ministry of Commerce, the total sales of offshore duty-free stores amounted to Rmb2.572bn (+20.7% YoY) during the 2023 CNY holiday, corresponding to average daily sales of Rmb0.37bn. With strong demand for duty-free consumption, the offshore duty-free market achieved a good start to 2023 during the CNY holiday, marking a solid step towards the island-wide sales target of Rmb80bn. We note that the sales of Haikou duty-free shops during the 2023 CNY holiday rose 132% YoY, leading us to believe that the sales of its new mall in Haikou will be an important source of increments in 2023. Recent passenger throughput at the Meilan airport has nearly fully recovered compared to 2019, showcasing the sustained popularity of Hainan as a post-CNY tourism destination. According to its preliminary results, the revenue from duty-free stores has shown significant growth both YoY and MoM. Coupled with our tracking of the share of online/offline sales and the trend of discounts, we expect its NPM to recover significantly in 1Q23.
　　 The resumption of inbound and outbound tours is favorable to the recovery of port duty-free stores, which won’t be a conflict of interest or a substitute for the offshore duty-free market in Hainan.
　　Up to now, more than 70 of the Company’s port duty-free stores have resumed operation. In terms of the market's concern about the impact of the resumption of outbound travel on Hainan's duty-free market, we believe that the recovery of outbound travel and the increase in Hainan's passenger flow will occur simultaneously, rather than serving as a substitute for each other. Offline duty-free sales in Hainan have been impacted by the pandemic in the past few years, while the online sales of taxed items have offset some of the negative impact. However, both earnings and the rebalancing of the sales category mix have been hit by the pandemic. Structurally speaking, the recovery of outbound tourism will hurt the online sales of taxed items launched during the pandemic. From the perspective of operations, offline duty-free channels are far more competitive than online channels for taxed items in terms of average revenue per user (ARPU) and profitability. In addition, the competitiveness of Hainan’s duty-free market has been improving in terms of categories, brands, pricing and shopping experience in recent years, which has allowed it to accumulate a growing number of core customers. On the other hand, the resumption of outbound and inbound travel may promote the introduction of downtown duty-free store policies, serving as new highlights for the Company.
　　Potential risks: Macroeconomic pressure weighing on consumer demand; the resurgence of Covid-19; intensified competition; exchange rate fluctuations; disappointing sales of new stores after opening; flawed corporate governance, etc.
　　Investment recommendation: 2022 was a special year, with a lack of offline consumer flows caused by multiple rounds of Covid flare-ups and the pressure on margins resulting from a structural imbalance of the sales mix. With the weakening of the pandemic and the recovery of offline traffic, the Company is likely to restore its growth logic, namely, the domestic duty-free industry is still in the high-growth stage, and channel expansion remains valid after the pandemic under the logic of consumption reshoring. CTG Duty Free’s own competitive advantages and barriers have been improving during the pandemic, and we expect significant room for revenue and profit to rebound after the recovery of passenger flows.
　　We reckon that the Company will still be the mainstay of completing the Hainan government’s sales target of Rmb80bn. Further optimizing the online and offline pricing system will help margins return to normal levels, and the successful opening of the Haikou cdf mall and the strong alliance with Swire to create a new tourism retail landmark will strengthen the growth momentum for the Company's medium- and long-term development. Factoring in its preliminary results, the established target of duty-free sales in Hainan Province, the impact of the ramp-up period of new projects, and the recovery of offline airport channels, we trim our 2022E-2024E net profit forecasts to Rmb5.02bn/13.19bn/17.07bn (from Rmb6.63bn/14.07bn/18.51bn), corresponding to EPS forecasts of Rmb2.43/6.38/8.25 and implying 33x/32x 2023E PE for its A-/H-shares at the current price (HK$1=Rmb0.9).
　　Considering the Company’s median/average forward PE of 31x/36x historically and taking into account its growth expectations and ROE level in addition to its valuation elasticity under expectations of recovery in 2023, we assign 35x 2024E PE to derive a one-year target price of Rmb288/HK$320 for its A-/H-shares and reiterate the “BUY” rating on both.
【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。

   【免责声明】本文仅代表第三方观点，不代表和讯网立场。投资者据此操作，风险请自担。