CHINA TOURISM GROUP DUTY FREE CORPORATION(601888)：DUTY-FREE LEADER TO GENERATE VISIBLE HIGH GROWTH IN THE LONG TERM

Preannounces earnings up 54-66% YoY in 2021

    China Tourism Group Duty Free Corporation (CTG Duty Free) has preannounced its 2021 results, estimating that attributable net profit rose 54-66% YoY to Rmb9.4-10.1bn; in 4Q21, attributable net profit stood at Rmb0.9-1.6bn. After deducting the rent refund for duty-free stores (DFS) at Beijing airports and all the tax benefits in Hainan (which we estimate to be a total of about Rmb2bn), the firm's attributable net profit was around Rmb7.4-8.1bn in 2021, according to our estimation. The results miss our expectations.

    Trends to watch

    4Q21 results declined on provisions for expenses and the COVID-19 resurgence; discounts to narrow in 1Q22. The 4Q21 results missed our expectations, mainly due to: 1) provisions for inventory impairment and employee bonuses; and 2) the spread of the pandemic that resulted in a 29% YoY decline of the traffic in Haikou Meilan International Airport (data from its Sina Weibo account) in 4Q21, which didn’t improve vs. 3Q21 (27%), causing deep discounts due to the pandemic. It is worth noting that in 3Q21 and 4Q21, earnings improved vs. 1Q20 and 2Q20 (recurrent net income of Rmb-0.12bn and Rmb0.78bn, respectively) despite frequent pandemic resurgences. Meanwhile, offshore duty-free stores (DFS) registered 67% growth in its sales volume during the National Day holiday, which was less affected by the pandemic. We also note that offline discounts in Hainan began to narrow in 1Q22 (according to CDF’s WeChat official account, most perfume and cosmetics in the firm’s duty-free stores in Haitang Bay were sold at a 25% discount for every three items sold together). Considering that brands tend to preserve their image and maintain price order, and the firm’s competitors prefer balanced market share and profitability, we think that the firm’s discounts will narrow and gross profit margin will improve.

    We expect overseas consumption repatriation to the Chinese mainland in the long run; duty-free store area expansion and the introduction of high-end luxury brands to boost future growth. We think that overseas consumption will continue to repatriate to the domestic market, thanks to: 1) domestic duty-free stores’ increasingly competitive prices and product range; and 2) long-term policy support. As the two factors are long-term trends, we think that the consumption repatriation will continue despite the recovery in outbound travel. We estimate that in 2025, overseas consumption by Chinese shoppers will repatriate by 19%, contributing Rmb253.4bn to the Chinese mainland duty-free market. We believe CTG Duty Free will grow stronger and maintain its leading market position backed by core competitiveness. We think that in the future, the firm’s growth will be boosted by the following measures. First, duty-free store floor area will continue to grow. New duty-free stores in the T2 terminal of Haikou Meilan International Airport were opened in December, 2021, and Haikou International Duty-Free Complex will be opened in 2022, with an area of 150,000 sqm. Meanwhile, floor areas of Sanya International Duty-Free Complex and the DFS in Sanya Phoenix International Airport will be expanded. Second, more high-end luxury brands will be introduced. We think that Sanya International Duty-Free Complex and Haikou International Duty-Free Complex both have strong regional advantages, which we expect will attract more and more global high-end luxury brands to enter Hainan.

    Valuation and recommendation

    Considering the COVID-19 resurgence, we lower our 2021 and 2022 earnings forecasts 10% and 10% to Rmb9.78bn and Rmb13.02bn, and introduce our 2023 earnings forecast of Rmb18.43bn. Given lower earnings forecasts and uncertainties brought by the pandemic, we cut our TP 30% to Rmb260, implying 39x 2022e and 28x 2023e P/E, offering 30% upside. The stock is trading at 30x 2022e and 21x 2023e P/E. We think that previously, the firm’s stock price decline reflects uncertainties over earnings resulting from the pandemic. As the pandemic is expected to ease and we are upbeat on the firm’s visible high growth. We maintain an OUTPERFORM rating.

    Risks

    Faster-than-expected liberalization of duty-free licenses; fiercer competition; effects of COVID-19 worse than expected.