The stock price has dropped by more than 80% in three years. Can a bull market save China Duty Free Group? | Kejin · Culture and Tourism

Author｜Chen Sizhu

Editor｜Wang Hanyu

"If it's not a very well-known brand, it's common to not have any customers in a day." Wang Fan, who resigned from Haikou Duty-Free City this year, said this.

In terms of the building volume, this shopping mall is currently known as the "world's largest duty-free commercial complex", which was previously announced by China Duty Free Group to be constructed with an investment of 12.86 billion yuan. As of the end of June this year, the cumulative investment has reached 7.399 billion yuan.

Since the opening of Haikou Duty-Free City, Wang Fan has joined as a sales specialist. He told 36Kr that when the duty-free city first opened in October 2022, the passenger flow was not bad, but the situation has not been optimistic since this year.

Zheng Li, who also works in Haikou Duty-Free City, has the same feeling. "From March (this year) until now, it hasn't been good," she said.

According to Hainan Daily, during the Mid-Autumn Festival holiday in 2024, the Haikou Customs supervised the off-island duty-free sales of 206 million yuan, with 34,700 shopping passengers. The average daily sales were 69 million yuan, and the average customer transaction value was 5,943 yuan. The average daily sales and the average customer transaction value decreased by 51.6% and 14.1% respectively compared to the first three days of the Mid-Autumn Festival holiday in 2023.

At the same time, the financial report of China Duty Free Group shows that in the first half of 2024, the company's total revenue, including Haikou Duty-Free City, was 31.265 billion yuan, a year-on-year decrease of 12.81%; the net profit attributable to shareholders of the listed company was 3.283 billion yuan, a year-on-year decrease of 15.07%.

Reflected in the secondary market, as of the press release (October 14), the latest share price of China Duty Free Group's A-share is 71.36 yuan per share. And by September 25 this year, its share price has dropped to around 50 yuan per share. Compared with the high of 387.40 yuan per share at the beginning of 2021, The share price of China Duty Free Group has dropped by more than 80% in more than three and a half years.

The "Gold Signboard" of Off-Island Duty-Free Is Losing Its Effectiveness

In the first half of this year, Hainan still attracted a large number of tourists. According to the data of Hainan Provincial Bureau of Statistics, from January to June 2024, the passenger throughput of ports and airports in Hainan Province was 35.6845 million person-times, a year-on-year increase of 9.1%, of which the number of departing passengers was 18.6117 million person-times, a year-on-year increase of 10.7%.

However, the performance of Hainan's off-island duty-free does not match the booming tourism popularity. According to the statistics of Haikou Customs, from January to June 2024, the shopping amount of off-island duty-free was 18.46 billion yuan, a year-on-year decrease of 29.9%; the number of duty-free shopping passengers was 3.361 million person-times, a year-on-year decrease of 10%.

As the main business of China Duty Free Group, the Sanya Duty-Free Shop in the city had a revenue of 11.986 billion yuan in the first half of the year, a year-on-year decrease of 29%; the profit was 643 million yuan, a 68% decrease compared to 2.023 billion yuan in the same period last year. The Haikou Duty-Free City Company, which started operating in 2022, suffered a loss of about 431 million yuan.

Wang Fan, who once worked on the front line, also intuitively felt the coldness of the market. He told 36Kr that even in the peak season this year, it did not bring a significant increase in sales performance, and in the off-season, it would fall into an embarrassing situation with no customers. "It has become the norm that only 5 or 6 days out of the 22 working days each month have sales orders," he said.

In the long term, the pressure on Hainan's off-island duty-free began to emerge in 2023. According to the sales data statistics of Jingjian Think Tank, in the whole year of 2022, the average number of duty-free shopping items per customer in Hainan's off-island duty-free was about 11.7, but it dropped to 7.6 in 2023, and in the first half of 2024, the average number of duty-free shopping items per customer was only about 5.9.

This means that the willingness of Hainan's off-island duty-free consumers to purchase has declined, and this decline has a certain trend.

Zhou Mingqi, the founder of Jingjian Think Tank, believes that the pressure on China Duty Free Group is related to the current consumption trend from a macro perspective.

From the data statistics of Jingjian Think Tank, in the first half of 2024, although both the duty-free shopping amount and the actual number of shopping passengers have decreased, The decline in the number of shopping passengers is much smaller than the decline in the shopping amount, which reflects the downward trend of per capita consumption.

Image Source: Jingjian Think Tank

From the perspective of enterprises, the gradual weakening of China Duty Free Group's dominant position is the main reason for its poor performance. "During the epidemic, China Duty Free Group almost monopolized the sales of domestic luxury goods," Zhou Mingqi believes. "However, currently, as international travel gradually resumes, consumers have more choices. Compared with other overseas markets, the price advantage of China Duty Free Group is not prominent, which naturally leads to the loss of customer groups."

The diversion of customer groups is not only reflected in the international market, but also the recovery of domestic airport and city duty-free shops has exacerbated the failure of the "off-island duty-free" gold signboard. Observing the financial reports of China Duty Free Group over the years, it is not difficult to find that the proportion of its revenue in Hainan region has dropped from 69% in 2021 to 63% in 2022, and then to 58% in 2023.

At the same time, the proportion of business revenue in the Shanghai region has been increasing year by year, from 18% in 2021 to 26% currently.

The Ebb Tide of the "Duty-Free Leader"

The leading position of China Duty Free Group in the duty-free industry cannot be denied. It was renamed from "China International Travel Service" and was established in 1984. In its 40-year development process, it has become a business card of the duty-free industry.

In 2008, China Duty Free Group was listed on the Shanghai Stock Exchange, and successfully went public in Hong Kong in 2022, ushering in the "A+H" era.

It can be learned from its prospectus that as early as 2021, China Duty Free Group's domestic duty-free market share has reached as high as 86%, and the number of stores far exceeds that of other duty-free enterprises. It is also the only retail operator in China that covers all duty-free sales channels and can operate airport stores, city stores, and off-island duty-free stores. In addition, China Duty Free Group is also the only one of the 10 tourism retailers with duty-free qualifications that holds three licenses.

From 2019 to 2021, under the influence of policy support and its own aura, the revenue and net profit of China Duty Free Group have increased. Its share price has also risen from around 60 yuan per share to nearly 400 yuan per share, enjoying an unlimited glory for a time and firmly establishing its position as the "duty-free leader".

Zhou Mingqi told 36Kr that the reason why China Duty Free Group was able to "soar to great heights" during this period is that in addition to policy reasons, its duty-free position in the luxury goods market has made a significant contribution. "When the position is no longer there, China Duty Free Group will naturally weaken for this reason."

Since 2022, the growth momentum of China Duty Free Group has stopped, with both revenue and profit declining: the revenue in 2022 was 54.433 billion yuan, a year-on-year decrease of 19.6%; the net profit was 5.03 billion yuan, a year-on-year decrease of 47.9%.

In the semi-annual report of 2023, although its revenue has increased, the net profit still decreased by 1.83% year-on-year; in the third quarter, although both revenue and net profit achieved double growth, there was a situation of "the share price hitting a three-year low", and the challenges continue, and the market confidence is much weaker than before.

In the first quarter of 2024, the decline of China Duty Free Group remains. Its revenue decreased by 9.45% year-on-year, and the growth rate of net profit slowed down, with only a 0.25% increase. By the middle of the year, there was a "double decline" in performance.

Is the dominance of China Duty Free Group as the "duty-free leader" disappearing?

In addition to the weakening of its dominant position, Zhou Mingqi believes that the current decline of China Duty Free Group is also due to its strategic mistakes.

Looking back at 2020, the Haikou International Duty-Free City project officially started construction and officially opened in October 2022. However, this strategic investment is not successful in Zhou Mingqi's view.

"In the case where the passenger flow is almost fixed or even decreasing, but the business scale is expanded instead, then the marginal effect will decrease," Zhou Mingqi explained.

At the same time, the remote location of the Haikou International Duty-Free City also foreshadows the scarcity of its passenger flow. "First of all, Haikou is not a very popular tourist destination," Zhou Mingqi said. "In addition, the location of the Haikou International Duty-Free City is not in the city center. Although there is a dock, the number of passengers choosing cruise ships to Hainan cannot support the passenger flow required by the large duty-free city."

In fact, during the peak period from 2019 to 2021, China Duty Free Group missed an important opportunity to increase its investment overseas. During that period, the number of inbound and outbound passengers decreased significantly, and the overseas duty-free markets were in a cold situation.

According to CCTV Finance and Economics, in 2020, the number of international tourists in South Korea decreased by 80% year-on-year, and South Korea's duty-free shops suffered their first loss since the statistics began 11 years ago. In February 2021, South Korea's two major duty-free shops, Lotte and Shilla, withdrew from Incheon International Airport.

Similarly, China Duty Free Group also chose to focus on Hainan during this period, but also missed the opportunity to explore the overseas market. When inbound and outbound travel gradually resumed, China Duty Free Group's overseas projects are still vacant and it is difficult to "get a foothold".

Today, with the weakening of its strong position, the lack of prominent price advantage, and the diversion of the target population, China Duty Free Group naturally falls into a predicament: it is difficult to attract inbound tourists, and outbound tourists also have more choices.

"As the leading enterprise of Hainan International Tourism, China Duty Free Group should focus more on the international market rather than just the domestic consumer group," Zhou Mingqi said.

Where Is the Way Out?

While the duty-free market in Hainan is under pressure, the port duty-free market has shown a significant growth with the recovery of inbound and outbound passenger flow.

The semi-annual report of China Duty Free Group shows that the revenue of China Duty Free Group's duty-free stores at Beijing Airport (including Capital International Airport and Daxing International Airport) increased by more than 200% year-on-year, and the revenue of duty-free stores at Shanghai Airport (including Pudong International Airport and Hongqiao International Airport) increased by nearly 100%, and the net profits have achieved significant growth.

At the same time, in the first half of 2024, the net profit of Sunrise Duty Free Shanghai was 310 million yuan, a year-on-year increase of about 36% compared to 8.388 million yuan in the same period last year, almost recovering to the profit level in 2019.

The recovery of the airport business has also given a strong boost to the decline of China Duty Free Group's performance.

In addition, in order to further reduce the cost pressure and continuously improve the profit ability, at the end of December last year, China Duty Free Group announced to sign a rent supplementary agreement with Beijing and Shanghai airports.

According to China Business Journal, according to the new agreement, the commission ratios of Terminal T2 and T3 of Capital Airport and Shanghai Hongqiao and Pudong airports for the China Duty Free Mall are uniformly adjusted from 47.5%, 43.5%, and 42.5% to values between 18% - 36% according to different categories. According to the actual situation, the sharing ratio is about 20% - 25%, which is a significant decrease compared to the original ratio.

"The decrease in fixed costs has also driven the increase in the profit of China Duty Free Group's airport business," Zhou Mingqi said, and in the long term, this cooperation will also have a positive impact on China Duty Free Group's profit ability.

In addition to the airport business, with the policy support, the city duty-free shops are gradually becoming a new trend in the duty-free business.

On August 27, the Ministry of Finance, the Ministry of Commerce, the Ministry of Culture and Tourism, the General Administration of Customs, and the State Taxation Administration issued the "Notice on Improving the Policies of City Duty-Free Shops", clearly stating that starting from October 1, 2024, the management of city duty-free shops will be regulated in accordance with the "Interim Measures for the Management of City Duty-Free Shops" to promote the healthy and orderly development of city duty-free shops. It is mentioned that the sales targets of city duty-free shops are passengers who are about to depart by air transportation or international cruise within 60 days (including but not limited to Chinese passengers).

The next day, the duty-free concept stocks opened sharply higher. Zhongbai Group and Youa Co., Ltd. had a daily limit, and many stocks opened higher. On the same day, the share price of China Duty Free Group also recovered somewhat.

In this regard, Dongwu Securities said that although the duty-free industry is under pressure under the background of the sluggish consumption willingness of residents from 2023 to 2024 and the diversion of overseas luxury goods consumption, in the long term, it is still an important channel to follow the growth of China's residents' luxury goods consumption. After the off-island duty-free in Hainan stabilizes, if the inbound and outbound duty-free policies are further liberalized, it is expected to promote the overall stabilization and return to growth of the duty-free market.

However, this "hot" business of city duty-free shops is not easy for China Duty Free Group. Although it once stated in the financial report meeting that it would consider expanding the city duty-free shops in Beijing and Shanghai. However, compared with China Duty Free Service, which has 12 duty-free licenses in the city nationwide, China Duty Free Group's 6 city duty-free operation licenses are not "impressive".

"The scale of China Duty Free Group's city duty-free shops is too small, and the market is also very limited," Zhou Mingqi said frankly, which makes it not dominant in the city duty-free field.

"The future development of China Duty Free Group lies in its courage to face the competition in the international market and actively explore and layout the international market."

Regarding the internationalization layout process, China Duty Free Group stated on the interactive platform on September 14 that it has set up city duty-free shops and airport stores in Phnom Penh, Sihanoukville, and Angkor in Cambodia. And it has newly