China Tourism Group Duty Free Corporation (01880): Under the "hot and cold effect", short-term performance is under pressure, but long-term value can be expected.

The phenomenon of "ice and fire two heavens" is being staged in China Tourism Group Duty Free Corporation (01880). On April 8, the State Administration of Taxation issued a notice to promote the "buy-now, refund-now" tax refund policy nationwide, simplifying the tax refund process, stimulating the potential of inbound tourism, and further accelerating the external circulation in conjunction with the relaxation of visa-free policies, contributing marginal increments to offline retail. Once announced, the next day, the stock price of China Tourism Group Duty Free Corporation surged - China Tourism Group Duty Free Corporation H shares soared by 23.66% to 56.7 Hong Kong dollars, while China Tourism Group Duty Free Corporation A shares recorded a strong limit up at 66.97 yuan. However, behind the violent surge in the stock price of China Tourism Group Duty Free Corporation is the continuous decline in the company's performance and the decline in valuation to historical lows. GMTEight observed that in 2024, China Tourism Group Duty Free Corporation's core financial indicators such as revenue and net profit both significantly decreased, with performance pressure apparent. At the same time, the company's valuation correspondingly entered a grinding period. As of the close on April 15, the company's Price-to-Earnings ratio TTM was 23.20 times, at historical lows. While there is the "hot effect" of the policy on one side, there is also the "cold effect" of declining performance on the other side. How should China Tourism Group Duty Free Corporation break out of this contrasting situation and drive both performance and valuation restoration? Weak market demand and profit squeeze have significantly pressured performance Looking at the latest financial report, the decline in both revenue and net profit of China Tourism Group Duty Free Corporation in 2024 is likely mainly due to various factors such as market environment and industry cycle. In 2024, the company achieved revenues of 56.474 billion yuan, a year-on-year decrease of 16.38%; attributable net profit of 4.267 billion yuan, a year-on-year decrease of 36.44%; non-net profit attributable to shareholders was 4.144 billion yuan, a year-on-year decrease of 37.70%, showing significant pressure on overall performance. In terms of revenue composition, the company's sales revenue from duty-free goods was approximately 38.666 billion yuan, a decrease of 12.58% year-on-year; sales revenue from taxable goods was approximately 17.095 billion yuan, a decrease of 23.49% year-on-year. Under the competition from cross-border e-commerce and overseas shopping, the online business of China Tourism Group Duty Free Corporation further narrowed. It can be seen that the slowdown in consumer demand has led to insufficient overall growth in the duty-free industry. The revenue in the Hainan region decreased significantly by 27.13% to approximately 28.892 billion yuan. As is well known, the Hainan region is the core market of China Tourism Group Duty Free Corporation's duty-free business, with this decline far exceeding the overall revenue decline of the company, making it a key factor in dragging down the company's performance. Despite the company's share in the duty-free market on Hainan Island increasing by nearly 2 percentage points year-on-year, the shrinkage of the overall market size did not revenue growth. According to statistics from Haikou Customs, in 2024, Haikou Customs supervised duty-free shopping amounting to 30.94 billion yuan, a decrease of 29.3%, with 5.683 million shopping trips, a decrease of 15.9%, and 33.082 million items purchased, a decrease of 35.5%. Compared to 2023, all three data points have declined to some extent, reflecting the weak demand in the duty-free market on Hainan Island. Meanwhile, in the face of weakening market demand, intensified competition has further eroded the company's core competitiveness. With the opening of the Global Beauty Plaza in Area C of the Sanya International Duty-Free City on December 28, 2023, the number of duty-free store brands increased further. By around January 2025, there were a total of 6 operators in the duty-free market on Hainan Island, and the number of duty-free stores had increased to 12, weakening China Tourism Group Duty Free Corporation's monopoly advantage. At the same time, cross-border e-commerce platforms (such as Tmall International and Dewu) and membership stores (such as Sam's Club), with their pricing advantages, have diverted customer traffic. Furthermore, the company's profit side has also been subjected to multiple pressures. During the reporting period, although the company's gross profit margin increased by 0.2% to 32.0% year-on-year, the profit side of the company is under heavy pressure. Firstly, due to increased discounting, the gross profit margin of the off-island duty-free business has decreased by 2.03 percentage points to 23.73% year-on-year, showing significant fluctuation in gross profit margin; secondly, airport channel rents have risen with the recovery of passenger flow, coupled with a decrease in inventory prices and impairment losses on contract performance costs amounting to 740 million yuan, further compressing profit margins. In addition, the net profit sharply declined in the fourth quarter, plummeting by 76.9% year-on-year to 3.48 billion yuan, undoubtedly indicating the poor profitability of the company. It can be seen that in the short term, the recovery of the Hainan market still relies on policy stimuli (such as increasing duty-free quotas), while in the long term, it needs to respond to international competition after the borders are closed. In addition, the landing effect of the new local duty-free policy, the pace of global economic recovery, and the resurgence of consumer confidence will be key variables. Stimulating the potential of inbound consumption, long-term value can be expected In the current weak market environment, the new policy of the "buy-now, refund-now announcement" is obviously no less than a "strong heart revitalization" for the duty-free market. Shenwan Hongyuan Group pointed out that the core of the "buy-now, refund-now" policy is to advance the tax refund to the consumption stage, allowing overseas tourists to more intuitively feel the tax refund benefits, stimulating the use of tax refunds for further consumption. Data from pilot cities show that 63% of immediate tax refunds are directly used for further consumption, confirming the significant stimulating effect of the "buy-now, refund-now" model on inbound tourist consumption. Reviewing the development history of tax-free policies in Japan from 2013 to 2019, it is found that tax-free and its supporting...Convenient policies have effectively enhanced the attractiveness of entry consumption for foreign tourists and promoted the continuous activity of the entry market. The "buy now, refund now" policy currently promoted in our country optimizes the consumption experience of inbound tourists. At the same time, the popularity of the tax refund model in our country is low, with a large market space. The tax refund and "buy now, refund now" convenience models are expected to accelerate landing in more regions, attracting more foreign tourists to enter and consume.This new policy will advance the tax refund process and expand it nationwide, allowing inbound tourists to more directly experience the convenience of tax refunds, potentially increasing their willingness for secondary consumption. Furthermore, it is worth mentioning that in recent years, the Ministry of Finance and other departments have continuously issued favorable policies to further support the duty-free market. For example, starting from October 1, 2024, the "Notice on Improving the Policy of In-City Duty-Free Shops" issued by the Ministry of Finance and other departments will be officially implemented, aiming to regulate the management of in-city duty-free shops and promote their healthy development. The dual enhancement of product variety and shopping convenience is expected to further boost the consumption vitality of inbound tourists. Among them, China Duty Free Group holds a market share of 81.74% in the domestic duty-free market (company's official website). Its duty-free stores serve as an important window for tourism retail and capturing consumer inflow, highlighting the value of its channels. It is expected to benefit from the growth in inbound tourist demand, introduce high-quality domestic products, expand product offerings, optimize consumer experiences, and drive operational recovery. Currently, as the restoration of inbound and outbound travel is underway, China Travel is gaining momentum, which undoubtedly will further contribute to the recovery of the duty-free market. According to data from the National Immigration Administration, in the third quarter of 2024, there were 8.186 million foreign arrivals, an increase of 48.8% year-on-year, with 4.885 million arrivals through visa-free entry, accounting for 60%, a year-on-year increase of 78.6%. "China Travel" has become a hot topic on overseas social media platforms, which may continue to fuel the trend of international tourists entering China. According to the China Tourism Academy, it is estimated that the number of foreign inbound tourists in 2024 may recover to over 80% of the level in 2019. As global travel recovers, the steady growth of inbound and outbound flows in China is expected to further unleash consumer demand in the Asia-Pacific region. According to Cohn, the size of the Chinese tourism retail market in 2022 reached about 100 billion RMB (calculated by sales revenue), with the duty-free market share in the tourism retail market rising from 55.1% in 2019 to 59.5%. Cohn predicts that the Chinese tourism retail market will continue to develop with a compound annual growth rate of over 40% from 2022 to 2026, with the duty-free market growing at an annual rate of 54%. In addition, the duty-free channels are expected to not be affected by the tariff disputes as they are exempt from import duties, consumption taxes, and value-added taxes, and may have a price advantage compared to other domestic channels, attracting some demand transfer. According to a press conference on April 10, special supervision areas in the pilot free trade zones will maintain the current policy of duty-free imports. Hainan is not only the largest pilot free trade zone in China in terms of geographical area, but also the only free trade port currently, and combined with upcoming border closures (expected by the end of 2025 according to the "Overall Plan for the Construction of Hainan Free Trade Port"), its strategic significance may increase. In conclusion, it is evident that with policy support and the overall trend of consumption recovery, the duty-free market is expected to continue to recover. Considering the further enhancement of the value of duty-free channels by China Tourism Group Duty Free Corporation, the company's leading position being solid, the active catalyzation of in-city stores, and other favorable factors, the company's performance and long-term value recovery can be expected.