After Hainan's closure: CTG DUTY-FREE's new cycle and protracted battle

On December 18, Hainan officially closed its borders for operations.

This marks a new phase in the construction of the Hainan Free Trade Port, with the entire island officially becoming a "domestic area outside customs" under customs supervision, implementing "open on the first line, controlled on the second line, and free within the island."

After the closure, the "first line" zero-tariff import goods list between Hainan and overseas has been significantly expanded: the number of goods benefiting from the policy will increase from about 1,900 to approximately 6,600, accounting for about 74% of all goods, an increase of 53% compared to before the closure.

The beneficiaries of the policy have further expanded, covering various enterprises, institutions, and private non-enterprise units on the island with actual import needs.

Currently, Hainan Island is still some distance from the "duty-free paradise" that consumers expect.

The "zero tariff" after this closure mainly exempts import tariffs, value-added tax, and consumption tax, with the central goal of promoting industrial development, which is a separate system from the "offshore duty-free" policy aimed at travelers.

The newly added range of goods is also more focused on raw materials and semi-finished products, rather than common consumer goods such as clothing, cosmetics, and luggage.

Therefore, both the shopping experience through duty-free channels and taxable channels will not be significantly impacted.

However, as the core engine for Hainan's construction of an "international tourism consumption center," the offshore duty-free sector still has a significant influence.

The gradual opening process of Hainan Island will push the duty-free leader, CTG DUTY-FREE, to an important juncture where challenges and opportunities are deeply intertwined.

The inclusive trade environment created by "zero tariffs" may attract more international brands and retail entities to enter Hainan in a more flexible manner, indirectly diverting high-end consumer groups.

At the same time, price competition from global retail channels such as cross-border e-commerce and overseas purchasing continues to impact the once-stable "low-price mindset."

It is not easy to maintain advantages under the new game rules.

CTG DUTY-FREE's moat may need to shift from a "copper wall and iron bastion" built on licenses to a comprehensive competition in supply chain, operations, and experience.

Opportunities in Hainan

Among many operators, CTG DUTY-FREE is the earliest and most heavily invested market leader.

Hainan currently has 12 offshore duty-free shops, with CTG DUTY-FREE occupying half of the positions and operating two globally leading duty-free complexes, "cdf Haikou International Duty-Free City" and "cdf Sanya International Duty-Free City," each exceeding 100,000 square meters.

In recent years, with favorable policies, the company's focus has significantly shifted towards Hainan, which has contributed over 50% of its revenue.

However, with the recovery of international tourism, changes in the consumption environment, and intensified competition, the Hainan duty-free market is experiencing "increased volume but decreased prices" in 2023 and 2024, putting pressure on CTG DUTY-FREE's performance.

In 2024, affected by a more than 20% decline in sales in Hainan, CTG DUTY-FREE's overall sales revenue decreased by 16% year-on-year.

In the first half of 2025, CTG DUTY-FREE's revenue continued to decline by 10% year-on-year, only stopping the decline in the third quarter due to an increase in the average transaction value of offshore duty-free purchases.

For offshore duty-free, which has long been affected by diversion, the Hainan closure policy is expected to enhance regional attractiveness, gather global business resources and customer flow, thereby driving the increase in service visits and average transaction value for leading enterprises. However, the market has differing opinions on the long-term impact of the closure.

While the overall flow pool of duty-free shopping on the islands is expanding, competition is becoming fierce, with several licensed enterprises such as Hainan Tourism Duty-Free, Hainan Control Duty-Free, Shenzhen Duty-Free, and China Duty-Free Group all making their moves.

Even though these competitors may struggle to surpass the leading players in overall scale, their efficiency in local markets and ability to divert customer traffic still pose a threat.

More critically, after the closure, non-licensed retail enterprises can also enjoy institutional benefits, and the overall tax burden is expected to decrease.

In the past, the price advantage of licensed duty-free enterprises mainly stemmed from the exemption of the "three taxes" in the import process, namely customs duties, consumption tax, and value-added tax.

After the closure, goods not on the negative list will be exempt from import taxes, and domestic enterprises will also not need to pay turnover taxes at the wholesale level.

If the "zero tariff" benefits are later expanded to individual consumers, the ultimate price advantage of duty-free channels will only be reflected in the retail segment: taxable businesses pay a 13% value-added tax, while duty-free businesses pay about 4% in franchise fees, resulting in a tax rate difference of about 9%.

In the longer term, the industry's focus will be on the deepening of the "simplified tax system" reform.

The "simplified tax system" refers to the merger of value-added tax, consumption tax, vehicle purchase tax, urban maintenance and construction tax, and education fee surcharges into a sales tax system that is only levied at the retail level after the island's closure.

KPMG predicts in the "Hainan Free Trade Port Tourism Retail White Paper 2025 Edition" that after the implementation of the sales tax system, Hainan is expected to continue to implement a dual-track system of taxable retail and duty-free retail in the short to medium term.

In the long term, "on-site duty-free" may replace the "off-island duty-free" system, where all tourism retail entities on the island achieve full exemption from import tariffs on consumer goods and a unified simplified sales tax is levied at the retail end, eliminating the distinction between licensed and non-licensed businesses.

On this basis, if significant discounts are given to off-island travelers on the duty-free item limits during the "second-line" exit from the island, extending the benefits of the free trade port policy forward, it will simplify customs supervision procedures and enhance the effectiveness of regulation.

This means that in the future, the price difference between imported goods in traditional taxable stores and those in duty-free shops may continue to narrow, fundamentally weakening the long-standing absolute price advantage of duty-free channels.

As more and more international brands and large retailers are eager to try their hand, the competitive pressure on China Duty-Free Group can be imagined.

Port Confrontation

China Duty-Free Group's advantageous position in other key battlegrounds is also changing.

Unlike the increasingly crowded competitive ecology within Hainan Island, the port duty-free channels represented by international airports, with their natural high concentration of traffic and scarcity, remain a fiercely contested area.

As the venue owner, the airport has a very high say and has become the main profit-sharing party in the duty-free channel.

Taking Shanghai Airport as an example, in the last round of contracts, its average annual sales guarantee amount was nearly 6 billion yuan, with a commission rate as high as 42.5%, and the actual fees charged were based on the higher of the guarantee and commission.

During the pandemic, due to a sharp decline in passenger flow, both parties temporarily adjusted to "no guarantee below, capped above." With the recovery of the civil aviation industry in 2023, the charging model has returned to "guarantee below," but the guarantee amount has decreased, and the commission rate has also dropped to 18%-36% With the passenger flow at Shanghai's two airports returning to pre-epidemic levels, a new round of negotiations for duty-free contracts has tilted the balance once again.

According to recently disclosed bidding results, the revenue for Shanghai Airport over the next eight years will come from a "minimum rent + commission" model, with a commission rate of 8%-24%.

Due to the new plan's antitrust provisions, the previous exclusive operation pattern by the "China Duty Free Group" (Japan Duty Free Shop (Shanghai) Co., Ltd., with a 51% stake held by China Duty Free) has been broken.

Ultimately, global travel retail giant Dufry won the bid for Pudong T1 through its subsidiary Dufry, while China Duty Free replaced its subsidiary Japan Duty Free Shanghai to take over the operating rights for Pudong T2 and Hongqiao T1.

In terms of the actual implementation model, China Duty Free and Dufry will each establish a joint venture with Shanghai Airport as the operating vehicle for the duty-free shops, with Shanghai Airport holding a 49% stake in each.

Overall, this new contract represents a "mutual compromise."

While the airport has made concessions on the sales commission rate, it has secured basic revenue through fixed rent and joint operation, retaining the right to dynamically adjust the minimum rent based on passenger flow.

China Duty Free, on the other hand, has relinquished the operating rights for one terminal against the backdrop of overall costs being roughly on par, ending its cooperation with "Japan Duty Free Shanghai" and shifting to independent operations.

From the perspective of China Duty Free, the future revenue contribution from the port duty-free channel is expected to be less than that from the offshore duty-free sector, but it still holds significant strategic importance as a key customer acquisition entry point and brand awareness window.

Although international passenger flow continues to recover, the overall influence and scarcity of airport duty-free channels have relatively weakened under the ongoing impact of emerging channels such as e-commerce.

In 2024, passenger throughput at Shanghai's two airports is expected to grow by approximately 30% year-on-year, reaching a historical high. In contrast, "Japan Duty Free Shanghai," which primarily operates Shanghai Airport's duty-free business, achieved revenue of 16 billion yuan, a year-on-year decline of about 10%.

Both the airport and the duty-free shops are beginning to show a stronger awareness of risk management and a pressing mindset to jointly expand the market.

According to the latest contract terms, Shanghai Airport will establish a sales incentive mechanism based on annual per capita consumption levels, encouraging duty-free shops to introduce competitive new products and low-margin items to enrich the product matrix.

CITIC Securities analyst Liu Wenle believes that this design aims to encourage duty-free operators to increase sales scale. Based on the current offline sales of 6 billion yuan, the effective rent rate of the new contract will be higher than that of the old contract, but the scale effect will become apparent once sales reach 9 billion yuan or more.

A similar model may be replicated at the Capital Airport, which is currently in the bidding stage.

Changjiang Securities analyst Han Yichao and others pointed out that the Capital Airport bidding covers T2 and T3 terminals, with rules similar to those in Shanghai: allowing foreign investment participation and stipulating that the same bidder can only win one segment, with expected results likely to be similar.

There is still a window

The essence of the duty-free business is based on a policy monopoly established on franchise licenses.

As price competitiveness weakens and target customer groups are continuously diverted by multiple channels, the dilution of monopolistic advantages has become an inevitable trend.

China Duty Free can no longer rely solely on natural market growth to sustain development; it has shifted its operational focus to expanding scale, adjusting product categories, and optimizing operations The "time window" for transformation still exists.

On one hand, the "first-tier cities open up, second-tier cities control" approach places high demands on cross-border commodity regulation, and the comprehensive implementation of the simplified tax system relies on the maturity of supporting systems, resulting in limited direct impact on the duty-free industry in the short term.

On the other hand, core duty-free categories such as cosmetics, bags, and watches have not yet been included in the negative list for "zero tariff" imports for enterprises.

On the eve of the full closure operation of Hainan Island in November 2025, the offshore duty-free policy welcomed a round of optimization: new categories such as pet supplies, portable musical instruments, and micro-drones were added; for the first time, departing travelers were officially included in the scope of benefits; island residents can enjoy the convenience of multiple shopping permissions within a year.

The effectiveness of the policy has been preliminarily verified by data.

According to statistics from Haikou Customs, from November 1 to 17, after the new policy was implemented, the sales amount of offshore duty-free reached 1.325 billion yuan, a year-on-year increase of 28.52%.

HuaXi Securities analyst Xu Guanghui believes that the precise policy measures taken before the closure fully reflect the central government's supportive attitude towards the long-term healthy and stable development of offshore duty-free.

In addition, the new policy allows six categories of domestic products, including clothing, shoes and hats, ceramic products, silk scarves, coffee, and tea, to enjoy the "sales first, refund later" tax policy to enter the duty-free channel.

Relevant personnel from China Duty Free Group recently expressed in investor communications that this policy model is "very friendly," especially helpful in smoothly transitioning high-potential, high-turnover categories such as sports and outdoor products from the original taxable operating model to the duty-free channel, thereby optimizing the overall product structure.

The scale advantage derived from huge traffic conversion remains the core leverage for China Duty Free to seize transformation opportunities.

China Duty Free believes that for emerging categories, rapidly scaling up is the cornerstone of deepening cooperation, and they are fully confident in the competitive advantages formed by this.

According to relevant personnel from China Duty Free, "A brand's initial annual sales were only a few million, but now it can reach billions or even tens of billions. Naturally, brand owners are willing to establish travel retail channels for the company and provide supporting services."

Collaboration with brands that previously had a sense of distance from the duty-free channel, such as "top luxury," is also deepening.

Starting in 2023, they began promoting the "S-store" model, aiming to create a number of benchmark duty-free stores that fully match the management, experience, and service of brand flagship stores, thereby attracting high-end brands to settle in.

Dior and LV have now settled in the second phase project of Sanya Haitang Bay under China Duty Free, but operate in a taxable channel, allowing China Duty Free to gain rental income and high-end customer flow benefits.

Goldman Sachs believes that China Duty Free has, to some extent, prepared for policy changes and is transitioning from a traditional duty-free commodity purchaser to a "landlord-type" operating model that provides store space for brands, actively adapting to the new industry landscape.

This is indeed reflected in China Duty Free's differentiated layout for the third phase of the Sanya Haitang Bay project.

The first phase focuses on efficient one-stop shopping in the form of a "department store box"; the second and third phases focus on dining, long-term experience projects, and standalone brand stores to meet customers' needs for leisurely browsing and in-depth experiences.

Among them, the third phase project, which is being jointly promoted with Swire Properties, will benchmark the island district concept of Miami, introduce internationally advanced circulation systems, focus on lifestyle scene creation, and plan to collaborate with brands like LV to launch exclusive product series for Sanya The new cycle of CTG DUTY-FREE may begin here