CTG Duty-Free recovery is still clouded due to weak consumer sentiment

The duty-free store operator’s financial performance rebounded last year, but lackluster results in the first quarter of 2024 may reflect growing consumer caution 

Key Takeaways:

  • CTG Duty Free’s first-quarter profit was basically flat, while its revenue fell by nearly 10% year-on-year
  • The company made a senior management change before its first-quarter announcement, the latest in a series of similar adjustments 

By Lau Chi Hang 

Are the happy days really back for duty free shopping in China, following a brutal three years during the pandemic? Or was last year’s strong rebound just a fleeting illusion?

The answer could lie in the latest financial reports from China Tourism Group Duty Free Corp. Ltd. (1880.HK; 601888.SH), including a 2023 annual results report published last month that showed a sharp post-Covid recovery, followed by first-quarter 2024 results last week that looked far less upbeat.

The annual results showed the company’s revenue and profit grew by 24% and 33.5%, respectively, last year from 2022. The post-Covid rebound, combined with cost savings from rent reduction deals it reached with Chinese airports at the end of last year, briefly returned the company to investor favor. 

Its stock reached HK$280 per share at a peak in 2022, valuing the company at a whopping HK$580 billion ($74 billion). But the shares have lost three-quarters of their value since then, wiping out HK$430 billion in market value. Many investors who got burned in the rapid decline were hoping the stock could regain some of its lost momentum on its strong post-Covid rebound last year.

Weak first quarter 

But the first quarter preliminary results were hardly what investors had hoped for. The company’s profit barely budged, up just 0.33% to 2.3 billion yuan ($318 million) in the three-month period. Its revenue fared even worse, dropping by nearly 10% to 18.8 billion yuan. Its gross margin rose 3.95 percentage points year-on-year to 32.7%. 

The stable profit in the face of falling revenue was the result of cost reductions arising from the new profit-sharing arrangements CTG Duty Free reached at the end of last year with airports that are home to many of its shops. 

Under the new agreements, shops in Beijing Capital International Airport, Shanghai Hongqiao International Airport and Shanghai Pudong International Airport that used to take cuts of between 42% and 48% of profits from CTG Duty Free’s stores lowered those rates to between 18% and 36%, with an average in the 20% to 25% range. In addition, the company also negotiated sharply lower limits for its base rents, which dropped to less than 600 million yuan at Beijing’s airport from a previous 3 billion yuan; and to an average of 700 million yuan from a previous 6.1 billion yuan at Shanghai’s two main airports. 

The new profit-sharing arrangement went into effect in January, meaning the big cost savings should be reflected in the first-quarter results. So, without the substantial savings obtained through those cuts, the company almost certainly would have reported a year-on-year profit decline for the quarter. 

Falling per capita spending 

The company has worked diligently for six years with partners on Hainan island, a popular vacation spot and free trade port that allows visa-free travel from a growing number of countries. It has six stores on the island, including the world’s top two duty-free commercial complexes, Haikou International Duty Free City and Sanya International Duty Free City. Despite such a strong position, the company’s failure to realize more revenue growth is inevitably disappointing investors. 

Underlying that weak performance is falling spending by Chinese consumers, especially on luxury goods. According to customs data, duty-free spending in Hainan over this year’s Lunar New Year holiday week from Feb. 10 to Feb. 17 reached 2.49 billion yuan from 298,000 shoppers, equivalent to 8,358 yuan per person. Total spending was up almost 60% from the Lunar New Year holiday in 2023. But the number of visitors was up even more by nearly 90%, with the result that per-capita spending fell 16%.

CTG Duty Free’s stock was unchanged on the day of its lackluster first-quarter announcement, though the shares fell in the following days, losing 8.3% of their value during the week. That speaks to investor skepticism about the company’s future performance and hesitancy about raising hopes too high for the company. 

Target price cuts 

Many investment banks have revised down their target prices for the company’s stock, suggesting they are also cautious on its outlook.

CCB International pointed out that CTG Duty Free’s revenue and profit growth had both slowed, and downgraded its profit forecasts for the company by 17% and 22%, respectively, for this year and next. It also lowered its target price from HK$105 to HK$94. After reviewing the first-quarter results, Macquarie Group also revised down its net profit forecasts for the years from 2024 to 2026 by between 0.8% and 1% and lowered its target price from HK$116 to HK$115. Daiwa Securities was the most pessimistic, believing that falling per capita spending would negatively affect CTG Duty Free. It downgraded its rating on the company from “overweight” to “outperform” and cut its target price from HK$135 to just HK$80. 

In fact, some investors may have been overly optimistic about CTG Duty Free’s 2023 performance. A closer look at the numbers shows a large part of its impressive performance last year came from revenues unrelated to its core retail business, including interest proceeds, foreign exchange settlement gains and government subsidies. These other revenues more than tripled from 420 million yuan in 2022 to 1.49 billion yuan last year. Its biggest other revenue source was a spike in interest income due to high interest rates. 

Another concern is recent instability in the company’s top ranks. In the week before the first-quarter announcement, the company disclosed that President Wang Xuan had resigned from his post. 

In February last year, the company also replaced its chairman, only to see the new chairman, Li Gang, suddenly die nine months later, to be replaced by Wang Xuan. Such a revolving door at the top won’t be too soothing for long-term investors who will worry about the implications for the company’s development strategies and might sit tight to see where new leadership is going. 

In a nutshell, big cost savings from the new airport deals notwithstanding, CTG Duty Free’s future will depend on the trajectory of China’s economy and household spending. It’s hard to read too much into just a quarter of lukewarm results, and investors will closely watch the company over the next few quarters. They will also be looking for any new policy support from Beijing in favor of Hainan and its duty-free shopping industry, and assessing to what extent CTG Duty Free will benefit. 

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