Expecting a better recovery in FY22F
? CDF issued a profit alert for FY21. Net profit rose by 54%–66% yoy to Rmb9.4bn– 10.1bn in FY21, slightly below our expectation, since tourist traffic suffered a sharp decline due to the epidemic situation in 2H21. The detailed result w ill be on 23 Apr.
? Since the Company’s sales in 1Q usually account for c. 30% of full-year sales, and given the current Omicorn situation in China, w e expect the Company’s business in Hainan to continue face some pressure in 1Q22F and to start to recover in 2Q22F.
? We expect the Company’s sales to grow by 21.0% yoy in FY22F, w ith net profit up by 21.3% yoy, driven mainly by a recovery in tourist traffic and improvement in the average ticket size.
? Reiterate Add w ith a low er DCF-based TP of Rmb301.
Sales in Hainan softened in 2H21 due to Covid-19 volatility
Based on the Company’s guidance for FY21, we expect net profit in 4Q21 to decline significantly by 46%–69% yoy to Rmb909m–1,609m, mainly due to the severe impact of Covid cases on its Hainan duty-free business. According to the Hainan government, the number of tourists visiting Hainan dropped by 17% yoy in 4Q21 (2H21: 16% yoy decline). According to the Department of Commerce in Hainan Province, total sales of 10 duty -free stores in Hainan reached Rmb60.2bn in FY21, up by 84% yoy. Duty-free sales rose by 83% yoy to Rmb50.5bn, the number of duty-free shoppers grew by 73% yoy to 9.7m, and the average ticket size in FY21 w as Rmb5,218, lower than that of Rmb7,001 in 1H21. We estimate that the Company’s sales in Hainan grew by 40%–50% yoy to c.45bn in FY21F, accounting for 90% of total duty-free sales in Hainan, indicating CDF’s strong leading position in Hainan’s duty-free industry.
Hainan’s duty-free services largely improved
There are five duty-free business entities on Hainan Island, and the number of duty-free stores increased to 10 as at the end of FY21. With the opening of Phase II of Haikou Meilan Airport, the total operating area of duty-free stores has reached 220,000 sqm, and CDF accounts for 80%–90% of the total duty-free space, based on our estimates. The number of brands in duty-free stores exceeds 720. The product categories have expanded from perfume and skin-care products to jewelry, watches, bags, clothing and electronics, providing consumers with more choices. Hainan Island added two delivery methods in
2021 -direct mail(????) and return for collection(????) which improved customer convenience when buying large products, such as alcohol and luggage cases.
Limited impact if Korea launches more aggressive duty-free policy
According to Jiemian.com, the Korean government plans to allow Korean duty-free shops to open online channels for overseas residents without Korean entry records to buy Korean duty-free goods directly. We believe this policy will have a limited impact on CDF’s business in Hainan, as 1) Hainan’s duty-free business focuses on tourists, instead of daigou business; Hainan Island has built up its tourism infrastructure and its ow n tourism brand in China’s travel market; and 2) during the past two years, there has been no big price difference between CDF’s platform and Korea duty-free channels, and CDF’s platform has developed customer loyalty and trust.
Reiterate Add with a lower DCF-based TP of Rmb301
We cut our EPS forecasts for FY21–23F by 2.3%–3.4%, to reflect a slower-than-expected recovery in Hainan’s tourist traffic due to the Covid-19 situation. CDF is currently trading at 31.9x FY22F P/E, 0.8 s.d below its historical mean of 41x since 2019. We reiterate Add, since w e expect Hainan’s duty-free market expansion to become a significant long-term growth driver and the Company’s bargaining power with brand suppliers to gradually improve. A potential catalyst is policy relaxation for downtown duty-free stores.