Ghost stories of China Duty Free, cold 618 data

After Maotai fell into a price decline, there have been recent spooky stories circulating in the market regarding consumption. One is about the sharp drop in duty-free sales on Hainan Island for middle-class consumers, and the other is the lackluster performance of this year's e-commerce 618 data, which even had the lowest level of attention.

1. Stock price dropped by 80%, spooky stories continue

The spooky stories that emerged yesterday mentioned three points:

1. Entering the off-season for duty-free shopping on Hainan Island in the second half of the year, lowering the full-year duty-free sales expectation to 30 billion yuan, a 30% decrease compared to 2023.

2. Estée Lauder Group's market tightening has led to less than ideal performance for new products. The sales speed of Estée Lauder brand is still slowing down, with La Mer's new product performance being average. Duty-free resources are overly tilted towards Korean duty-free, which has a significant impact on Hainan duty-free.

3) It is expected that there is limited room for further improvement in international passenger traffic recovery in the second half of the year, with airport duty-free recovery lower than expected, taking 2-3 years to recover to the 2019 level.

Referring to customs data, it is similar to the rumors.

According to statistics from Haikou Customs, in May, the number of duty-free shopping visitors on Hainan Island was 418,800, a 16% decrease year-on-year. The shopping amount was 1.974 billion yuan, a 38.3% decrease year-on-year, with an average amount per person of 4,714 yuan, a 26.5% decrease year-on-year.

Among them, the sales of perfumes in May were 872 million yuan, a 38.3% decrease year-on-year, accounting for 44.2%; the sales of luxury goods (clothing, accessories, bags, shoes, hats) were 349 million yuan, a 36.0% decrease year-on-year, accounting for 17.7%.

Affected by this news, China International Travel Service Corporation's shares have dropped by another 6% in the past two days, falling 70% since January last year and over 80% from its historical high.

Even more terrifying is that despite the significant drop in China International Travel Service Corporation's shares, the fundamentals have not yet shown a turning point, and investors still have to endure frequent negative news, which lowers market expectations and suppresses stock prices.

Originally, the market expected a recovery for China International Travel Service Corporation this year, but according to customs data, the sales in the first quarter of this year, except for February, all decreased by 30-40% year-on-year. Even though sales did not decline in February, the average spending per customer still decreased. In January, the average spending per customer was 5,831 yuan, a 28.5% decrease year-on-year, and in February, it was 6,650 yuan, a 10.6% decrease year-on-year.

Looking back at the decline over the past three years, it is similar to the logic mentioned earlier. When China International Travel Service Corporation's shares dropped by 50%, the market looked at the price-earnings ratio falling below the average level based on the original profit forecast, making it seem like a good value proposition, prompting some funds to start bottom fishing.

However, consumer demand is difficult to predict. From the perspective of some investors, they may think that from the moat perspective, China International Travel Service Corporation is the largest offline duty-free platform in China. As long as tourism consumption recovers, it will definitely be the biggest beneficiary.

The marginal changes in demand have affected this logic. Firstly, even though the scale is large enough, the number of tourists visiting Hainan this year has decreased, and the average amount spent per person continues to decline compared to last year.

There are two reasons for the decrease in tourists. According to management at a conference, this year's rainy season in Hainan/Sanya is more frequent than before, leading to a decrease in the number of tourists. Another reason is that the depreciation of the Japanese yen has accelerated this year. From the perspective of consumer cost-effectiveness, traveling to Japan now costs about 30% less compared to 5-6 years ago due to the exchange rate. Therefore, more tourists are willing to choose Japan or South Korea for their travel needs.

Regarding the decrease in the average amount spent per person, it can be seen from CPI and retail data that the recovery rate is indeed lower than expected.

Market expectations were that after the restrictions were lifted, tourists would return to consume in Sanya/Hainan. However, the reality is that after the restrictions were lifted, people chose to travel abroad instead. Perhaps in the previous years, it was inconvenient to travel abroad, leading some consumers to consider traveling but with limited domestic options, they chose Hainan or other cities. With more visa-free countries now available and the advantage of exchange rates, China Duty Free Group's competitiveness has been somewhat affected.

This is also evident in the data. In May, the number of duty-free shoppers in Hainan reached 418,800. According to data from the Japan National Tourism Organization, in May, the number of Chinese visitors to Japan was 540,000, which is 72% of the same period in 2019. According to the Japan National Tourism Organization, the number of Chinese tourists to Japan from January to May this year is approximately around 3.58 million.

Based on the marginal changes mentioned above, the current consumption demand is difficult to predict. If China Duty Free Group misses its performance, it may lead to a situation where the valuation becomes more expensive as it falls. The stock price has not yet bottomed out, partly due to the fund's collective buying trend in 2020-2021. China Duty Free Group's market value once reached 700 billion, with a P/E ratio exceeding 80 times for nearly a year. Now, it is paying the price for the overvalued behavior in the past.

As of now, the P/E ratio of China Duty Free Group's H shares is around 14.5 times, with a dividend yield of 5%, while the P/E ratio of its A shares is 20 times, with a dividend yield of 3.5%. The company has over 36 billion in book value but no buyback plan.

Compared to Maotai, China Duty Free Group's situation may be worse. Although it seems to have a 3.5% dividend yield, when revenue expectations are lowered, the dividend amount will also decrease. For example, this year, the median profit according to Wind is 7.9 billion yuan. If the market rumors of a 30% revenue downgrade are true, how much will the profit decline?

Therefore, looking at the current dividend yield, the safety cushion is not thick enough. Consumer goods are often harder to find a safety margin in a downturn, especially when management does not engage in buybacks and the cash on the books remains untouched. Despite the falling stock price, the current valuation may not have reached its bottom yet.

Where could the bottom be?

Currently, the H-share P/E ratio is around 14 times. In the most pessimistic scenario, seeing a bottom at 10 times P/E would still leave significant downside potential. In the 2023 fiscal year, if the company increases the dividend payout ratio from 32.9% to 50%, and if the company can use the additional 50% of profits for buybacks, then the stock price will at least not look like it is heading towards delisting Moreover, the company has no debt pressure and holds 36 billion in cash. As long as the management is willing, the execution pressure is not significant.

If the company does not repurchase, relying solely on the turning point of the company's fundamentals improved by investors' speculation, no one can predict where the bottom is. If you want to buy the dip, waiting for the company's performance to truly turn around and then entering when certainty increases is not too late. After all, the company's scale is one of the largest consumer betas. Considering entering after the turning point is reached is not too late.

2. The Quietest 618 Ever?

If offline duty-free shops may be affected by travelers' choices, looking at e-commerce data will provide a more comprehensive view. This year's 618 is also known as the least attention-grabbing one.

Because this year, major e-commerce platforms have all canceled the "presale" segment. In previous years, before 618 started, consumers would participate in presales first, and then combine orders to participate in more discount activities. This year, after the cancellation, for consumers, the discounts come more directly, without the previous complexity. However, according to consumer feedback, they all feel that this year's promotions are not as good as last year.

According to Xingtu data, during the 2024 618 period (Tmall from May 20th 20:00 to June 18th 23:59; JD from May 31st 20:00 to June 18th 23:59 (other platforms until June 18th 23:59 as announced by each platform)), the cumulative sales of comprehensive e-commerce platforms and live streaming platforms reached 742.8 billion yuan.

According to Xingtu data, the sales during the 2023 618 period were 798.7 billion yuan, meaning that this year's 618 overall sales decreased by 7% year-on-year, a decrease of 55.9 billion yuan. Among them, comprehensive e-commerce sales accounted for 571.7 billion yuan, a 6.9% decrease year-on-year, while live streaming sales increased from 184.4 billion yuan to 206.8 billion yuan.

![] (https://cdn-img.capwhale.com/kmc/ueditor/20240620/9bbe4e5ee2524b03b861092da71a2564.jpg)

Among the popular sales categories, grains and seasonings are 11 billion yuan, snacks are 6.1 billion yuan, beauty and skincare are 26.1 billion yuan, perfumes and makeup are 9.1 billion yuan, cleaning and hygiene are 15.1 billion yuan, nutrition and health care are 9.2 billion yuan, pet food is 5.5 billion, and household appliances are 75.6 billion yuan.

![] (https://cdn-img.capwhale.com/kmc/ueditor/20240620/e7cba43d345c4ed5b6945ab067be8928.jpg)

Due to the year-on-year decline in Xingtu statistical data, the market today has also been somewhat affected. Some sellers believe that because some scenarios and fields were not included in the calculation process, the year-on-year data has declined.

According to the data obtained from the research of major platforms by sellers, there is still a significant gap compared to Xingtu data. (Data may not be accurate)

• Taotian is 619.7 billion yuan, up 13.07% year-on-year, accounting for 50%-60%, which is equivalent to the total volume of the entire network being 1.18 trillion yuan.

• JD.com is 285.74 billion yuan, up 7.3% year-on-year, accounting for 24%-26%.

• Pinduoduo is up 27% year-on-year, accounting for 15%-17%.

III. Conclusion

It is worth noting that regardless of whether the statistical data from all parties has been modified, combined with the situation of China Duty Free, the trend of consumption downgrading both online and offline is evident. Even though the express delivery data of e-commerce has increased by 20% in terms of volume, the overall unit price has declined, indicating that consumer recovery remains weak