China Duty Free, 700 billion gone in smoke!

China Duty Free has suffered greatly. In just over three years, its market value has plummeted from over 800 billion to just over 100 billion. A staggering 700 billion has vanished.

The continuous devaluation is due to poor performance, right?

Yes and no.

In the first half of 2024, China Duty Free's revenue decreased by 12.81% year-on-year, and its net profit decreased by 15.07%. In 2023, China Duty Free's profit was 7.266 billion yuan, which is a 40% reduction from the peak of its stock price and performance in 2021.

However, it is evident that the decline in China Duty Free's stock price is much more severe than the decline in its performance. The profit has not yet been halved, but the stock price has already been "ankle-cut."

The reason lies in the fact that the logic of the duty-free business is no longer favored by capital. In fact, it's not just China Duty Free; another leader in the duty-free concept, Wangfujing, has also seen a sharp decline in recent years.

What problems is the duty-free industry facing?

Downgrading of demand + intensified competition.

The consumer group for duty-free goods mostly belongs to the "middle class" of society, not wealthy but not entirely poor either. The group currently experiencing a severe downgrade in consumption coincides with the duty-free consumer demographic.

Moreover, duty-free goods essentially allow domestic consumers to purchase imported goods at lower prices. However, the current backdrop of the consumption race is the rise of high-cost-performance domestic products. In the domestic market, many international brands continue to lower their prices, even to the point where the prices in shopping malls are lower than those of duty-free goods. Under such circumstances, how can the duty-free industry not be bleak?Additionally, the price wars in e-commerce pose a direct threat to the duty-free industry, as cross-border e-commerce platforms often have an advantage over duty-free shops in terms of convenience and cost-effectiveness for consumers.

Data supports this, as more people are traveling to Hainan, but fewer are willing to purchase duty-free goods:

According to statistics from the Haikou Customs, from January to June 2024, the amount of off-island duty-free shopping was 18.46 billion yuan, a year-on-year decrease of 29.9%; the number of duty-free shoppers was 3.361 million person-times, a year-on-year decrease of 10%.

However, the number of tourists to Hainan Province in the first half of this year has actually increased compared to the same period last year. According to data from the Hainan Provincial Bureau of Statistics, from January to June 2024, the passenger throughput of Hainan's ports and airports 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%.

Therefore, duty-free industry leaders like China Duty Free are facing a triple whammy of valuation, performance, and logic challenges.

Is there no chance for China Duty Free to turn things around?

Not necessarily.

Emerging city-based duty-free shops could become the "lifeline" for the duty-free industry.

The practice of city-based duty-free shops in developed countries has proven that, with proper operation, there is room for commercial imagination.

Not long ago, multiple departments including the Ministry of Finance, Ministry of Commerce, and Ministry of Culture and Tourism issued a notice that from October 1, 2024, the number of city-based duty-free shops in China will be expanded from the current six to twenty-seven.The advantage of duty-free shops in the city lies in their convenience and proximity to urban residents; purchasing in advance in the city and picking up at the port of departure does not affect consumers' other schedules for the day; moreover, the rent for city duty-free shops is lower compared to airport duty-free shops.

Although duty-free shops in the city are still in the initial stage in our country, from a global market perspective, many countries have already had successful experiences.

Taking South Korea as an example, over the years, with the relaxation of licensing and the increase in the tax-free limit, city duty-free shops in South Korea have seen significant development.

At the end of 2019, before the pandemic, there were a total of 57 duty-free shops operating in South Korea, with 22 city duty-free shops, accounting for nearly 40%. Data shows that the annual compound growth rate of sales in South Korean city duty-free shops is as high as 30%, far exceeding the 5% of port shops. In 2019, the sales scale of city duty-free shops in South Korea accounted for more than 80%, and in the past two years, it has further increased to over 90%. The prosperity of city duty-free shops not only supports the growth of the South Korean duty-free market but has also become an important engine for driving consumption growth in South Korea.

Currently, the first batch of transformed city duty-free shops are all part of the China Duty Free (CDF) system. For China Duty Free, whether it can "change its destiny against the odds" depends on whether it can leverage its licensing advantages to seize opportunities and maximize the sharing of policy dividends.

Finally, it is worth noting that China Duty Free's dividends are substantial, with a dividend payout ratio exceeding 30% for more than ten consecutive years, and in 2023, it has been significantly increased to over 50%. In terms of valuation, China Duty Free's current price-to-earnings ratio is less than 20 times, which is the lowest level since the company went public in 2009!

The capital market has significantly lowered its expectations for China Duty Free, so could this be an opportunity?