China International Travel Service: Tough Times, "Double Kill" Harsh

On the evening of April 23rd, China Duty Free Group officially released its financial report for the first quarter of 2024. As key data such as revenue and net profit had already been disclosed in the previous flash report, the incremental value of this official report is not significant. Purely from the perspective of performance trends:

1. Playing without shopping, tax-free recovery is slow to see: The total revenue for this quarter is approximately 18.8 billion RMB, marking the first year-on-year decline (-9%) in the past 23 years. However, the actual year-on-year growth in the number of tourists received in Hainan this quarter was 6.7%, but the number of tax-free shopping trips and shopping items decreased by 5% and 33% respectively. It is evident that the tendency of tourists to "browse without buying" is still prominent.

From an individual perspective, the average number of shopping items per person decreased from 9 items last year to 6 items, while the average price per item increased by about 13% year-on-year. However, the impact of the decrease in quantity is stronger than the increase in price. Overall, there is a trend of "less but better" in tax-free shopping (buying fewer but higher-priced items).

2. Despite the decline in revenue, China Duty Free Group's gross profit increased by about 4% year-on-year, with the gross profit margin rising significantly from 29% last year to 33%. On one hand, as mentioned earlier, there is a trend of "less but better" in offshore duty-free consumption; this increase may also be due to further reductions in discounts on goods.

However, the company's marketing expenses also increased by nearly 400 million RMB year-on-year, leading to a decrease of about 100 million RMB in the gross sales difference that reflects actual sales profits year-on-year. On one hand, as revenue growth becomes more challenging, increasing marketing and customer acquisition investment is a necessary measure; on the other hand, the recovery of channels such as airports inevitably leads to increased costs such as airport rent and commissions.

3. No improvement in internal cost control, only maintaining profits by reducing taxes: Against the backdrop of difficulties in external revenue growth, the company's internal management expenses increased by about 6% year-on-year, and the financial income, which decreased by about 310 million RMB year-on-year last year, also decreased to 130 million RMB this quarter. This led to a year-on-year decrease of about 300 million RMB in China Duty Free Group's operating profit (equivalent to 8%). The only positive news is that the income tax expenses provisioned this quarter decreased by nearly 220 million RMB year-on-year, largely offsetting the decline in pre-tax profit, resulting in a nearly flat year-on-year net profit attributable to the parent company at 2.3 billion RMB. Maintaining profits without decline is already a challenging task.

Dolphin's Viewpoint:

Overall, the trend of tourists browsing without buying and the weakness in tax-free shopping have yet to show signs of improvement, with revenue declining instead of increasing. In terms of industry data, there is a trend of decreasing shopping conversion rates and a decrease in the quantity of shopping items but an increase in price. Both consumers and goods are showing a trend of "less but better". However, the current benefit of price increase is not as significant as the decrease in quantity. Until the user purification is completed, the bottom of total sales may not have arrived yet From a profit perspective, although the improvement in gross profit after the decrease in the quantity of goods and the increase in prices has alleviated, the pressure of rising marketing expenses and the lack of willingness to control internal costs have made it rare for China Duty Free to maintain its profits without decline.

As for the policy benefits after the closure of domestic duty-free and Hainan, there is currently no sign of implementation, and there is a lack of clear positive logic in both the short and long term for the company.

Looking ahead to the full year of 2024, the market previously expected the net profit attributable to the parent company to be around 8 billion. However, based on the performance of this quarter, there is considerable pressure to achieve this expectation. If duty-free consumption does not pick up in the future, it is feared that the company will not be able to squeeze out much profit solely through internal cost control. In other words, using the 67 billion profit achieved last year as the benchmark for valuation judgment, the current valuation of 22x is not very cost-effective.

Here is a detailed analysis:

1. Playing without shopping, the slow recovery of duty-free shopping: In the first quarter of 24, China Duty Free achieved total revenue of about 18.8 billion, a year-on-year decrease of -9% for the first time since 23. Although the high base effect caused by the peak performance just after the opening last year is the reason for the decline, the negative revenue growth once again indicates that duty-free consumption is still quite weak.

However, from industry data, the weakness in duty-free consumption is not unique to China Duty Free. In the first quarter, the number of tourists received in Hainan actually increased by 6.7% year-on-year, indicating that the popularity of domestic travel to Hainan is not bad, but the number of duty-free shopping trips and the number of shopping items have decreased by 5% and 33% respectively. In other words, the trend of tourists "browsing without buying" continues, leading to duty-free sales on the island in the first quarter amounting to 12.8 billion, a significant decrease of 24% year-on-year.

From an individual perspective, the average number of shopping items per person has decreased from 9 items last year to 6 items, while the average price per item has increased by about 13% year-on-year, but the impact of quantity reduction is stronger than price increase, resulting in a 21% year-on-year decrease in average consumer spending.

From the above data, a scenario can be constructed— consumers' shopping behavior is showing a trend of buying fewer but higher-priced items. We speculate that, on the one hand, the impact of clearing out the daigou (overseas personal shoppers) group may still be ongoing, and on the other hand, with more high-end brands entering, the product structure may increasingly lean towards high-value single items.

Therefore, in response to the 24% decline in duty-free sales on the island, the company's 9% revenue decline should be offset by other non-island duty-free channels (entry and exit ports) and relatively stronger performance in taxable sales

2. Improvement in Gross Profit, but Increase in Marketing Expenses: Despite a decline in revenue this quarter, China International Travel Service Corporation's gross profit increased by about 4% year-on-year, attributed to a significant rise in gross profit margin from 29% last year to 33%. On one hand, this corresponds to the trend mentioned earlier of a more refined duty-free consumption on outlying islands; on the other hand, it may also be due to further reduction in discounts on goods.

However, despite the improvement in gross profit, the company's marketing expenses also increased by nearly 400 million yuan year-on-year, resulting in a reduction of about 100 million yuan year-on-year in the gross sales difference that reflects actual sales profit. Dolphin Research believes that, on one hand, as revenue growth becomes increasingly challenging, China International Travel Service Corporation may have increased marketing and customer acquisition investments; on the other hand, in combination with the detailed breakdown in the previous annual report, the gradual recovery of duty-free channels such as airports is bound to lead to an increase in airport rental and commission expenses.

3. Harsh Operating Environment with No Internal Cost Control, Relying Solely on Tax Reduction to Preserve Profits: Against the backdrop of external challenges in revenue growth and profit drag from rising marketing expenses, the company's internal administrative expenses have not been compressed, increasing by about 6% year-on-year, and financial net income related to interest income and expenses also decreased by nearly 200 million yuan year-on-year, leading to a year-on-year decrease of about 300 million yuan in China International Travel Service Corporation's operating profit (equivalent to 8%).

Almost the only positive news comes from a nearly 220 million yuan year-on-year decrease in income tax expenses provisioned for this quarter, largely offsetting the decline in pre-tax profit, resulting in a nearly flat year-on-year net profit attributable to the parent company of 2.3 billion yuan for this quarter. Maintaining profit stability can be considered a challenging achievement.

Dolphin Research's Previous Studies on China International Travel Service Corporation:

October 27, 2023 Financial Report Review "Weak Revenue and Profit, Is There No Hope for Duty-Free Sales Recovery?" Financial Report Review on August 26, 2023: "China International Travel Service: Just browsing, duty-free consumption is hurting"

Financial Report Review on April 28, 2023: "Travel booming, is the spring of China International Travel Service coming soon?"

Financial Report Review on March 30, 2023: "China International Travel Service survives the water crisis, only a desperate counterattack is missing?"

Financial Report Review on October 29, 2022: "In the midst of turmoil, China International Travel Service's 'coolness' is within expectations"

Financial Report Review on April 23, 2022: "Revenue deterioration, profit recovery, China International Travel Service is still going through the ordeal"

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