China Tourism Group Duty Free Corp Ltd: Positioned for Growth Amidst Reviving Consumer Sentiment and Policy Support

Date of Report: 7 October 2024
Broker: OCBC Investment Research

Company Overview

China Tourism Group Duty Free Corp Ltd (CTGDF) is a leading duty-free operator in China, holding more than 80% of the market share. Established in 2008, with its wholly-owned subsidiary, China Duty Free Group Co. Ltd (CDFG) founded in 1984, the company is ranked number one globally among travel retail companies. The firm operates over 190 duty-free stores across more than 90 cities in Greater China and Cambodia, including prominent locations in Hainan Island, Beijing airports, Shanghai airports, and Hong Kong International Airport. While its primary focus is duty-free operations, CTGDF also engages in other businesses such as duty-paid retail, dining, entertainment, and leisure.

Recent Developments and Performance Drivers

1. Policy Support:
   The Chinese government introduced a series of easing policies in September 2024 aimed at stimulating the economy and revitalizing the stock markets. These measures, including stabilizing home prices and reducing mortgage interest burdens, are expected to have a positive impact on consumer sentiment, thus benefiting CTGDF’s operations.

2. Hainan Duty-Free Sales:
   Hainan remains a core driver for CTGDF, with its duty-free stores on the island contributing significantly to revenue. CTGDF anticipates a sequential improvement in Hainan’s duty-free sales momentum, aided by stabilizing foreign exchange rates that make product prices more competitive. In August 2024, daily Hainan duty-free sales were approximately CNY 62 million.

3. Downtown Duty-Free Stores:
   CTGDF is preparing to capitalize on the long-awaited downtown duty-free store (DFS) policy, with all downtown DFS stores expected to complete product preparations by October 2024. Downtown DFS stores provide more flexibility and are expected to contribute to higher ticket sizes and better margins than airport stores.

Financial Summary

• Market Cap: CNY 158.7 billion

• Shares Outstanding: 2,069 million

• Revenue:

  • 2023: CNY 67.5 billion
  • 2024E: CNY 67.4 billion
  • 2025E: CNY 75.7 billion

• Net Profit:

  • 2023: CNY 6.7 billion
  • 2024E: CNY 7.8 billion
  • 2025E: CNY 9.2 billion

• EPS (CNY):

  • 2023: 3.2
  • 2024E: 3.8
  • 2025E: 4.4

• Dividends per Share (CNY):

  • 2023: 1.7
  • 2024E: 1.9
  • 2025E: 2.3

• Gross Margins:

  • 2023: 31.8%
  • 2024E: 32.6%
  • 2025E: 33.6%

Investment Highlights

1. Growth from Downtown Duty-Free Policy:
   The downtown DFS policy, announced in August 2024, is expected to unlock new growth channels for CTGDF. The expanded product range, better shopping environment, and flexibility of downtown DFS stores could yield higher ticket sizes and improve margins.

2. Earnings Momentum in Hainan:
   CTGDF expects to see a boost in Hainan’s duty-free sales, driven by improved product pricing competitiveness due to stabilizing exchange rates. The company forecasts a continued upward trend in the lead-up to the peak shopping season between October and February.

3. Valuation Upside:
   The fair value estimate for CTGDF is lifted to CNY 100.10 per share, based on a higher valuation multiple of 27x forward price-to-earnings, factoring in potential upside from the downtown DFS stores.

Risks and Challenges

1. State-Owned Enterprise (SOE) Reform:
   Uncertainty related to SOE reform and potential business reorganization could impact the company’s operations and growth trajectory.

2. Price Competition:
   CTGDF faces price competition from “daigou” sellers and cross-border travel sales, which could pressure margins.

3. Hainan Tourism Risks:
   Unexpected factors, such as a decline in visitors to Hainan province or reduced shopping spending, could negatively affect the company’s sales.

ESG Considerations

1. Corporate Governance:
   Following board changes in April 2024, CTGDF improved its governance practices, reducing concerns about government intervention. However, it continues to lag behind peers in addressing carbon footprint risks.

2. Data Privacy and Cybersecurity:
   As a duty-free retailer with over 32 million active members in 2023, CTGDF has significant exposure to data privacy risks. The company leads its peers in cybersecurity measures, with a group-wide data privacy policy and a data breach management plan.

3. Labor Management:
   CTGDF’s retail operations are labor-intensive, but the company provides non-statutory benefits and leadership training. However, it lacks performance-based incentives, which could enhance staff productivity.

Conclusion

CTGDF stands to benefit from the revitalization of consumer sentiment driven by policy measures, the expansion of the downtown DFS policy, and improving sales momentum in Hainan. While challenges such as competition and SOE reform persist, the company’s dominant market position and favorable policy environment support a positive outlook for future growth.