Is spring coming soon for China Duty Free with a surge in outbound tourism?

On the evening of April 27th, China Duty Free Group released its first performance report for 2023, with the following highlights:

1. More travel, less spending? In the first quarter, China Duty Free Group achieved revenue of RMB 20.8 billion, with a year-on-year growth rate rebounding to 24%. Compared with the customs data showing that the duty-free sales amount of Hainan Island was RMB 16.87 billion, with a year-on-year growth of 15%, it can be seen that the company has achieved better performance than the industry average through its advantages in scale and online channels.

However, the passenger volume at Sanya and Hainan airports during the same period increased by 48% year-on-year. In comparison, the recovery of duty-free consumption is not as strong as that of travel and entertainment. But from an absolute perspective, the revenue of China Duty Free in this quarter did reach a new high after 2019, and the recovery is also quite significant.

2. Expensive inventory, unexpected decline in gross profit margin? Although the national travel volume has strongly recovered, China Duty Free Group has also reduced product discounts. However, the actual gross profit margin in the first quarter was 29%, which was 5 percentage points lower than the same period last year. The final gross profit was only slightly higher than that in 2022. The company explained that the reason for the decline in gross profit was mainly due to the significant appreciation of the US dollar in 2022, which resulted in higher inventory costs and eroded gross profit.

3. Decline in gross profit margin, rigid expenses, and year-on-year decrease in profit: mainly due to the significant decline in gross profit this quarter and the sales expense ratio, which accounted for the largest proportion of expenses, increased from 8.7% in the same period last year to 9.9%. Although the management and financial expense ratios have decreased year-on-year after the recovery of revenue scale, the company's operating profit margin has still narrowed by more than 5 percentage points year-on-year, leading to a year-on-year decrease in profit for the quarter. Finally, the net profit attributable to the parent company was RMB 2.3 billion, a year-on-year decrease of 10%, which was lower than market expectations and the biggest flaw in this financial report.

4. What are the prospects for China Duty Free Group in the future? 1) With the approaching May Day holiday, recent travel numbers can be described as overwhelming. According to statistics, the three airports on Hainan Island are expected to receive passenger flows during the May Day holiday that are more than 20% higher than that of 2019, completely offsetting the impact of the epidemic. This shows the strong demand for travel, which is bound to benefit duty-free retail. After the passenger flow recovers, China Duty Free Group is also tightening discount rates, which is expected to further improve the gross profit margin. At the same time, the upward trend of the brands of the products sold by China Duty Free is also worth looking forward to. It is reported that the growth rate of Q1 boutique, watches and jewelry and other categories exceeded 40%, and the proportion further increased. Haitang Bay Phase II is introducing luxury brands, and Hermes at Beijing Airport and Gucci at Capital Airport are preparing to open. With the enrichment of luxury product categories, it is expected to further raise the unit price and gross profit margin. This will promote the demand for duty-free consumption and further release the company's performance.

Observation of Changqiao Dolphin :

Overall, the repair trend of China Duty Free's performance in the first quarter was good after the release of epidemic prevention and residents' rapid tourism repair. Although it is slightly lower than the market's more full expectations, at least the performance repair trend in the second quarter will most likely continue to rise.

Combining the profit of 2.3 billion achieved in the first quarter, China Duty Free's stock price has also sharply retreated, and the current valuation of the company has entered a relatively reasonable range. As the domestic tourism and leisure demand continues to release and ferment, Dolphin believes that the prosperity of duty-free consumption will also further increase, and there is a possibility of performance exceeding expectations.

Therefore, at the current point, Dolphin believes that it can be relatively optimistic in the short and medium term, and there is a resonance opportunity for performance exceeding expectations and valuation rising for a period of time. However, the impact of the closure of Hainan in the long term is not yet clear, and after the expansion of duty-free licenses, the competitive landscape will inevitably intensify, and we should also pay attention to it.

Research of Changqiao Dolphin Investment and Research on China Duty Free:

March 30, 2023, Financial Report Review: "China Duty Free overcomes market woes and only falls short of a counterattack?"

August 31, 2022, Financial Report Review: "Under the epidemic, China Duty Free finally stabilizes."

April 27, 2022, "Under the shadow of the epidemic and intensified competition, it is not yet time for China Duty Free to reverse."

April 23, 2022, "Revenue deterioration and profit recovery, China Duty Free is still going through the hurdle."

November 15, 2021, "Is the curse repeating? The future of China Duty Free is still shining."

July 5, 2021, "China Duty Free (Part I): Is being a monopoly just a pipe dream?" Risk Disclosure and Statement for this Article: Dolphin Investment Research Disclaimer and General Disclosure