CTG DUTY FREE(601888)TRACKING REPORT：CLEAR RECOVERY DESPITE MULTIPLE CONCERNS

　　Core views:
　　The operation of the newly opened cdf Haikou international duty-free shopping (DFS) complex - a project of China Duty Free Group (CDFG), part of the listed China Tourism Group Duty Free - is in line with market expectations based on our research and observation. Both cdf DFS complexes in Sanya and Haikou are cutting discounts quarterly, indicating the adjustment of the pricing system and likely pickup of the Company’s profit margin. Current sluggish stock price reflects market concerns about the bottleneck in Hainan’s growth and potential impact of outbound travel recovery. We believe that the short-term slow growth is mainly due to the impact of discounts, customer structure, stocking situation, and other factors. We believe as the potential of the cdf Haikou DFS complex is released and the subsequent project of the Sanya complex opens for business, the bottleneck of customer accommodation is likely to be broken in the short term. We also believe that the recovery of outbound tourism will have a limited diversion effect on the Hainan market. We maintain our call on the long-term value of CTG Duty Free and suggest investing amid corrections.
　　Abstract:
　　Recent tracking: Offshore duty-free market regained popularity with tourism recovered in Hainan.
　　Offshore duty-free market has continued its boom after the Chinese New Year (CNY) holiday, with passenger throughput at Meilan International Airport recovering to 89.9%/91.9%/92.9% of the level in the same period of 2019 during the first/second/third week after the holiday. According to Haikou Customs, offshore duty-free sales in Hainan amounted to Rmb8.95bn from Jan 7 to Feb 15, with average daily sales of Rmb224mn (vs. Rmb205mn in 2M22), maintaining solid growth from a high base. Through research, we observe that commodity prices of duty-free shops have increased over 2H22, and discounts are likely to be cut in 2M23, with less discounts on boutiques. Both cdf DFS complexes in Sanya and Haikou provide 20% off for 3 pieces for most of the perfumes and cosmetics products. And the newly opened cdf Haikou complex has achieved boutique brands coverage of at least 80%, with cooperation with more boutique brands going forward.
　　Adjusting the price system is one of key focuses, with brands more cautious about parallel channels.
　　According to channel tracking, the share of online offshore duty-free sales is slightly higher in 2M23, compared to that in 2M22, and the online sales increase is likely to be great during the CNY holiday. We believe that online membership shopping will still play an important role in 2023 as an essential supplement to offline shops. However, with the accelerating recovery of airport traffic, online sales of airport channels are likely to decline. The pricing system has been affected among different channels amid the Covid pandemic, and we believe that the adjustment and recovery of it will be one of the focuses in 2023. We found that prices of most categories are currently lower in offline channels than online channels by selecting some stocking keeping units (SKUs) as samples from brands such as Lancome, Estee Lauder, Decorte, La Mer, Helena, Shiseido, etc. According to Kansas Development Finance Authority (KDFA), although the foreign shopper number of Korean duty-free market has increased QoQ since 3Q22, the sales amount has declined, which we believe is mainly due to the tightening of brand attitudes towards parallel channels, resulting in restrictions on online shopping agents. We believe that the restriction is a general trend, and the overall business environment of the domestic duty-free market will tend to improve with the gradual recovery of the taxed market.
　　Focusing on margin rebound in the short term.
　　Concerns about growth bottleneck have emerged as the duty-free sales growth was lower than that of the passenger traffic during the CNY holiday. We believe that, in the context of consumption backflow, Hainan’s offshore duty-free market will continue to increase with the gradual progress of free-trade-port policy, and it is still too early to worry about the ceiling of the market. We attribute the low growth of offline sales during the CNY holiday to the following factors: 1) Discount cuts compared to last CNY, with prices 5%-10% higher YoY; 2) High percentage of family tours during the first long holiday after eased control measurements; 3) Duty-free goods in short supply; 4) Faster growth rate of online channel. Considering factors above as well as high base of last year, we believe that the sales data since 2023 has been relatively excellent. With the opening of 2nd site of cdf Sanya International DFS complex phase 1 project, the short-term growth pressure caused by area restrictions and long queues may be relieved. Current industry data does not reflect the Company’s clear expectations of gross profit margin (GPM) improvement. Although the cdf Haikou International DFS complex sales percentage of online channels increased YoY in Jan and Feb 2023, as the discounts cut slightly YoY, the GPM increased YoY per our estimates. If the overall price increase is 5%, the GPM is likely to rise by 2.2ppts YoY when combined with the changes in the online share.
　　Outbound travel is not the alternative of travel to Hainan, and Hainan’s competitiveness is improving.
　　According to Flight Master, international flights have recovered to 10%-15% (vs. 6.3% on Jan 1, 2023) of the level in the same period of 2019, with 30%+ (vs. 15.6% on Jan 1, 2023) recovery level for regional flights, which are likely to maintain a relatively fast recovery, but the full recovery will take some time. The liberalization of outbound travel is beneficial to the port duty-free shops and may drive the introduction of in-city duty-free policy for residents. We believe that the outbound recovery is not contradictory with passenger increase in Hainan. Structurally speaking, online taxed sales will be reduced while the average revenue per user (ARPU) and profit margin are much better for offline duty-free channels than online taxed sales. Moreover, the competitiveness of Hainan’s duty-free market has been improving over the past few years, in terms of categories, brands, prices and shopping experience, accumulating a large number of core users. By reviewing Korean and Chinese market before the Covid pandemic, the growths of the two markets were synchronized (with a 26.2%/25.0% CAGR for Korean DFS/Chinese tourism retail market in 2016-19) rather than trading off. In addition, the potential diversion effect of online shopping agents is not significant for the Company as it has a significantly lower share of online shopping agents compared with its competitors.
　　Potential risks: Macroeconomic pressure weighing on consumer demand; more-than-expected pandemics; intensified competition; exchange rate fluctuations; disappointing sales of new stores after opening; flawed corporate governance, etc.
　　Investment strategy: With the recovery of offline traffic, the Company is likely to return its growth rationale in 2023, namely, the domestic duty-free industry is still in the high-growth stage, and the 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 amid the Covid pandemic, and we expect significant rebound of its revenue and profit after the recovery of the passenger flows. According to our research, the Company has outstanding competitive advantages in Hainan’s offshore duty-free market and the sales of new shops will contribute essential increments. We believe that the Company will still be the mainstay of completing the established target (Rmb80bn) of duty-free sales in Hainan Province. Further tightening discounts and optimizing of online and offline pricing system will help margins return to normal levels. In the medium term, the recovery of outbound travel is not contradictory with the increase in Hainan traffic, implying a controllable potential effect. We maintain our 2022E-24E net profit forecasts at Rmb5.02bn/13.19bn/17.07bn, corresponding to EPS forecasts of Rmb2.43/6.38/8.25 and implying 31x/29x 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。