CDF is getting in the groove

China Tourism Group Duty Free has significantly lowered its costs with new lease agreements at Beijing and Shanghai airports, as investors eye potential for new tourism stimulus 

Key Takeaways:

  • China Tourism Group Duty Free’s profit grew 33.5% last year, while its revenue rose 24.2% to 67.6 billion yuan
  • The duty-free store operator’s fourth-quarter profit surged by 275.6% year-on-year


By Li Shi Ta

Tourist traffic into China is slowly rebounding in the year since Beijing removed of pandemic-related restrictions, though that has yet to translate into handsome earnings for cross-border tourism plays. But new, better-than-expected financials from China Tourism Group Duty Free Co. Ltd. (CDF) (1880.HK; 601888.SH) are bringing hope for a battered corner of China’s tourism sector that, unlike domestic travel, has yet to strongly rebound.

CDF’s preliminary results released on Jan. 8 show the duty-free store operator brought in revenue of 67.6 billion yuan ($9.5 billion) and a profit of 6.72 billion yuan last year, up 24.2% and 33.5% year-on-year, respectively. Revenue in the fourth quarter rose 11.1% to 16.7 billion yuan, while profits for the period soared 275.6% to 1.51 billion yuan.

The company’s Mainland China- and Hong Kong-listed shares both got a lift from the strong report, emerging from their downward spiral last year to rise 6.4% and 4.2%, respectively.

New financial life on renegotiated leases 

CDF and other airport-based companies reliant on international traffic took a major hit during the pandemic as international travel into and out of China came to a near standstill, even as the companies were forced to continue paying rent and other operating expenses. 

In a nod to that reality, CDF announced late last year that it had signed supplementary lease agreements with Beijing and Shanghai airports that sharply reduced its rental costs by substantially cutting the commission rates the airports charge for different product categories. 

The airports also slashed the minimum amounts of money the company had to pay them each year. Beijing Capital International Airport dropped the minimum from about 3 billion yuan annually to less than 600 million yuan, while Shanghai’s two major airports dropped the amount from about 6.1 billion yuan to 700 million yuan. The latter two began implementing the new agreements from last December, and the new Beijing agreement took effect this year.

While the reduced rental costs won’t do anything to improve CDF’s revenue, they should provide a nice boost to its profitability by reducing costs in the year ahead. In the first half of 2023, the company brought in 35.9 billion yuan in revenue, up 29.7% year-on-year. But its profit actually fell 1.83% for the period to 3.87 billion yuan.

Responding to media inquiries, the company confirmed that the new rental agreements would have a positive impact on its profitability. It added it has also seen a sustained rebound in travel, but noted that its performance would ultimately depend on how much tourists were willing and able to spend.

Duty-free shopping still recovering

In 2022, CDF derived 63% of its revenue from South China’s Hainan island, one of the nation’s top resort destinations known for its beaches and year-round warm weather. The company has six duty-free stores in Hainan, including at Haikou International Duty-Free City and Sanya International Duty-Free City, the world’s top two duty-free commercial complexes. At the end of 2023, Zone C of its Sanya International Duty-Free City officially opened for business, becoming the world’s first standalone commercial complex specializing in high-end makeup and perfume.

According to Haikou Customs statistics, Hainan’s duty-free sales in 2023 reached 43.8 billion yuan, up 25% year-on-year, though per capita spending fell 22% to 6,478 yuan. Duty-free sales totaled 182 million yuan on the first day of this year’s three-day New Year holiday, up 7% year-on-year. But again, per capita spending dropped 20% year-on-year to 6,843 yuan, suggesting that duty-free consumption is still weak in line with China’s slowing economy.

HSBC noted that CDF’s business may be preparing to turn a corner and that its rental costs were starting to decline after peaking in the fourth quarter. It said government policy could be the company’s main revenue catalyst in the short-term. The potential for policies tailor-made for Hainan as a free trade port in 2025 could provide a major boost for the company’s stock, though uncertainties surrounding the policy will limit such upside potential. HSBC remains overweight on both CDF’s Mainland- and Hong Kong-listed shares, but lowered its target price on the Hong Kong shares by 13.7% from HK $135 to HK $116.50.

Municipal duty-free market

As tourists tighten their purse strings, CDF is exploring the domestic duty-free market outside its traditional bases in Hainan and international airport terminals. In March 2023, it announced an investment of 1.23 billion yuan in China Overseas Personnel Service Co. Ltd., becoming the company’s second-largest shareholder with a 49% stake.

The transaction gives CDF a post-entry municipal duty-free license, and it also gains control of 12 municipal duty-free shops owned by China Overseas Personnel Service in Shanghai, Beijing, Hangzhou and Chongqing.

Unlike pre-exit municipal duty-free licenses that let businesses serve people about to leave the country, post-entry municipal duty-free licenses allow them to cater to Chinese citizens over the age of 16 who can purchase duty-free goods worth up to 5,000 yuan and pick up those goods on site within 180 days after entering the country.

A 2020 central government document on promoting domestic consumption points out the need to optimize policy for the duty-free industry, partly by placing equal emphasis on Chinese citizens returning home and foreigners leaving China.

A research report by Soochow Securities estimates the long-term value of the domestic municipal duty-free market at between 101 billion yuan and 152.4 billion yuan, adding the municipal duty-free policies for Chinese cities could have a similar impact as in Hainan. Citibank expects such policies to be introduced sometime this year as outbound tourist activity continues to pick up, which might provide another shot in the arm for CDF.

The new airport rental agreements, opening of the new duty-free complexes in Hainan and the rally in its earnings have provided a strong start for CDF in 2024. A sharp decline last year drove down the company’s projected price-to-earnings (P/E) ratio to 30 times. That means the stock could have some upside when compared with the 56 times of Hainan Haiqi Transportation Group (603069.SH), the company that acquired Hainan Travel Investment Duty Free Co. in 2022.

The China Tourism Academy forecasts the country will see accelerated recovery in both inbound and outbound tourism this year, with annual round-trip travel exceeding 264 million trips and international tourism revenue surpassing $107 billion. Already benefiting from many positive factors, CDF is likely to become a major beneficiary of that building rebound, and could get an extra lift if the yuan continues its recent strengthening and China rolls out new policies to further promote the duty-free shopping sector.

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