20220308-招银国际-中国中免-601888.SH-Management_initiatives_may_not_fully_dispel_uncertainty_over_the_planned_margins_recovery__down_to_HOLD_13页_1mb

CMB International Global Markets | Equity Research | Company Update Summary

Core Content and Key Information

Company: CTGDF (601888 CH)
Rating: HOLD
Target Price: RMB212 (Previous: RMB350)
Current Price: RMB188.3
Price Change: +12.6% from previous target price

CTGDF, a major player in the duty-free market in Hainan, is currently under a HOLD rating due to uncertainty surrounding its ability to achieve planned margins recovery. Despite a strong rebound in 4Q21 tourist traffic (+63% QoQ), the company faced a sharp decline in share prices due to aggressive discounts. Management has pledged to improve margins in 2022 through disciplined promotions and price collusion with other Hainan duty-free operators. However, the 100bn RMB sales target for 2022E appears challenging, especially with the fluid travel outlook and the potential disruption from lower-margin businesses such as e-commerce and duty-paid sales.

Main Points and Analysis

Earnings and Financials

• Revenue: FY22E revenue is estimated at RMB98bn, down 14% from previous assumptions. This includes RMB11bn from Sunrise Shanghai/Shanghai Airports and RMB80bn from Hainan offshore operations (accounting for 80% of Hainan's target).
• Gross Margin (GPM): Reduced to 31.6% (from 38.9%), with duty-free at 34% and duty-paid at 26%. Cosmetics and apparels remain the highest contributors with GPM of 40%+ and watches/jewelry at 30%+. Electronics have the lowest GPM at ~10%.
• Net Profit: FY22E net profit is estimated at RMB11,346 million, with a 7.3 percentage point cut in GPM. EBIT margin is relatively flat to showcase management's efficiency.
• P/E Multiple: Lowered to 36.5x (from 49.0x), now at -1 standard deviation below the 3-year average.

Market Share and Expansion

• CTGDF holds an estimated 80%+ market share in Hainan, with key retail spaces in Sanya and Haikou.
• The expansion of the Sanya International Duty-Free Complex (Phase I and II) is crucial to sustain leadership, with Phase II expected to be completed in 2023 and the hotel area to open in 2026.
• CTGDF's offshore duty-free stores have shown strong growth, with a CAGR of 93.4% from 2018 to 2020.

Policy and Market Outlook

• The Chinese government has introduced several supportive policies to revive the duty-free market, including increased spending allowances and the development of integrated travel retail complexes.
• The next expected policy is the relaxation of duty-free shopping for Hainan onshore residents, which could represent a RMB10bn addressable market.
• The 14th Five-Year Plan aims to repatriate overseas consumer spending to the domestic market, with CTGDF positioned to benefit from this trend.

Domestic Consumption Trends

• In 2019, China tourists spent RMB1.8tn overseas, with 55% attributed to KDFS. Domestic spending was only RMB54bn.
• CTGDF estimates that 10% of overseas spending could be redirected to the domestic market, boosting the latter by 33%.
• Despite pandemic restrictions, duty-free sales in Hainan rose to RMB5,822mn in 2021, with a 43.8% YoY increase in sales value and a 2.9% increase in spending per shopper.

Key Risks

• Uncertainty over the recovery of tourist traffic and the ability to achieve the 100bn RMB sales target.
• Potential disruption from the rising contribution of lower-margin businesses.
• The impact of travel restrictions and the fluid travel outlook on profitability and growth.

Key Ratios and Performance Metrics

Metric	FY19A	FY20A	FY21E	FY22E	FY23E
Revenue (RMB mn)	48,612	52,597	67,670	98,392	138,324
Gross Margin (%)	51.1	40.6	34.2	31.6	34.5
Net Margin (%)	9.5	11.7	14.2	11.5	12.0
P/E (x)	n.a	n.a	38.3	32.4	22.2
P/B (x)	n.a	n.a	12.7	10.0	7.7
ROE (%)	23.3	27.5	33.2	31.0	34.6
Net Debt to Equity (%)	52.4	54.6	45.2	36.5	36.5

Strategic Initiatives

• Online Strategy: CTGDF has developed an online platform to engage customers throughout their travel journey, including personalized product recommendations and live streaming shows.
• Customer Engagement: Integrated loyalty programs and online customer service have been implemented to enhance customer retention and satisfaction.

Share Performance

Metric	1-Month	3-Month	6-Month
Absolute (%)	-10.3	-11.2	-38.2
Relative (%)	-5.3	-0.4	-13.8

Conclusion

The company faces challenges in achieving its 2022E sales target and recovering gross margins, despite a strong rebound in tourist traffic. The potential for supportive policies, especially those related to onshore duty-free shopping, remains a key upside risk. CTGDF's expansion plans and online strategy are critical for long-term growth, but the current financial outlook suggests a HOLD rating due to the uncertainty in the market and the impact of lower-margin businesses.