Travel rush is not golden enough for investors in CTG Duty Free

Shares in China’s leading operator of duty-free stores have slumped after the company failed to meet high expectations for a post-pandemic rebound

Key Takeaways:

• CTG Duty Free’s revenues jumped nearly 28% in the third quarter and net profit surged 93%, but the recovery from Covid lows was not vigorous enough to satisfy shareholders
• The death of the company chairman, a pivotal figure at the firm, could add to market jitters as CTG’s fourth-quarter performance comes under scrutiny

By A. Au

Freed from Covid restrictions, hordes of Chinese holiday makers set off on long-awaited adventures during this year’s “Golden Week” getaway, in an exodus that was expected to deliver a bonanza for the travel industry.

But the splurge on travel has fallen short of the loftiest projections, leaving some investors out of pocket.

When China eased its travel controls, shares in the country’s leading operator of duty-free stores soared on an anticipated release of pent-up demand. At its peak, the share price of China Tourism Group Duty Corporation Ltd. (CTG) (1880.HK; 601888.SH) reached HK$280 in January this year.

But the company’s latest quarterly earnings, along with data for the recent holiday period, were not stellar enough to satisfy market hopes for astronomical profits.

CTG shares tumbled last Friday to close at just HK$92.35, 67% below the January peak.

This year, China’s Mid-Autumn Festival coincided with the Golden Week holiday, raising hopes of an intense surge in travel-related consumption. Figures from China’s tourism ministry show a rise in spending, but it was not quite the supercharged boost that some had been looking for. Domestic tourism revenue jumped 130% to 753 billion yuan ($103 billion) in the eight-day holiday from Sep. 29 to Oct. 6, compared with the same period a year earlier. But the spending was only 1.5% higher than the equivalent period in 2019 and failed to match the government’s forecast of 782 billion yuan.

Although disappointed investors hammered the share price, CTG delivered some positive earnings figures. Revenue in the three months to the end of September rose 27.9% to 14.98 billion yuan, while profit soared 93.2% to 1.33 billion yuan, the fourth straight quarter of growth. On a nine-month basis the firm’s revenue rose 29.1% to 50.8 billion yuan but net profit grew by a mere 12.3% to 5.2 billion yuan from the year-earlier period, implying reduced cost-effectiveness.

A recovery in domestic tourism was the main driver of revenue growth, along with government policies to spur consumption, the company said. It plans to continue to focus on Hainan’s offshore duty-free market, while promoting business at its stores in key airports such as Beijing and Shanghai.

The company’s mainland and Hong Kong shares fell nearly 5% after the underwhelming earnings and could not stage a solid rebound in the following sessions, as investors struggled to come to terms with thwarted expectations.

A low-base effect

CTG’s recovery was slow compared with other tourism-related stocks, said Kenny Wen, KGI Asia’s head of investment strategy.

“If we look at the third quarter alone, there was a lot of growth on the surface. But the most important thing is that, in the same period last year, its performance was affected by the Covid pandemic in a number of mainland China’s major tourism provinces,” he said. That created a low base and meant the actual net profit of 1.33 billion yuan for the third quarter undershot market expectations.

Going forward, the company will no longer benefit from rent cuts and waivers to support business during the pandemic, Wen said. A return to standard rents is pushing up costs even as the flow of airport traffic increases, while the overall rebound in Chinese domestic demand has been weaker than anticipated. All these factors could compromise CTG’s profitability.

UBS said the results were in line with its forecasts, but a net margin of only 8.9% in the third quarter, mainly due to rising rental costs in Shanghai airport, was lower than expected. The investment bank has thus kept its target price at HK$153 with a “buy” rating. However, it is worth noting that UBS slashed its target price for CTG from HK$238 to HK$153 in August this year.

Another significant development came on Oct. 15 when the company announced the death a day earlier of its chairman, who was appointed to the post in February this year. The company paid tribute to Li Gang, who passed away aged 56 after a brief illness, for his years of service but played down the business impact of his untimely death. Li did not hold any company shares and CTG has enough remaining directors to fulfil legal requirements. Executives and staff would work hard to ensure CTG had a sustainable and healthy future, the company said.

According to public data, Li was a founder member of China National Travel Service (CITS), the precursor of CTG, serving as CITS chairman from March 2017 to August 2019. During his tenure the company set up duty-free outlets in major airports, entered a joint venture with the renowned French travel retailer Lagardère, and clinched the rights to alcohol and tobacco sales in Hong Kong’s international airport. The loss of a key figure barely eight months into his latest leadership role could unsettle investors and cast a shadow over the company’s share price.

With roots in Hainan, CTG has six stores in the province, including the world’s first- and second-largest duty-free outlets: Haikou International Duty Free City and Sanya International Duty Free City. In the recent Golden Week getaway, overall consumption was not as strong as expected although Hainan welcomed nearly 4.27 million tourists over the eight-day holiday. That was 1.8 times more than last year, but only 2.8% higher than the same period in 2019.

Duty-free sales to Hainan’s offshore visitors amounted to 1.33 billion yuan during the eight-day break, a 120% jump from the same period last year, according to the customs service in Haikou City. The number of shoppers rose 140% to 170,000. Further government measures to stimulate sluggish consumption could give another lift to duty-free sales.

After an eight-month decline, CTG’s price-to-earnings (P/E) ratio has slipped to 36 times, leaving it considerably undervalued when compared with the 260 times for rival Haiqi Group (603069.SH).

Investors could be tempted to snap up a bargain but Dickie Wong, executive director of research at Kingston Securities, advocates a wait-and-see stance, citing signs of fragile consumer confidence in China.

“Judging by the valuation, CTG’s current price is indeed attractive,” Wong said, but he went on to note blunt warnings about retail demand from LVMH Group (LVMH.PA), owner of luxury brands Louis Vuitton and Dior, and weakness in the stock and property markets, which could constrain the willingness to spend.

Investors are advised to bide their time. “After all, there are plenty of low-valued stocks on mainland and Hong Kong exchanges right now,” Wong said.

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