Sustainable long-term leading position
? In FY21, sales grew by 29% yoy to Rmb67.67bn, and net profit rose by 57% yoy to
Rmb9.65bn, in line with our expectations.
? Management said the Company achieved over 20% yoy growth in Jan and Feb for both
sales and net profit, but the Omicron outbreak had a large effect on sales in Mar. Sales
in 1Q22 fell by 7% yoy, and net profit dropped by 10% yoy, below our expectations.
? We now expect the Company’s sales to grow by 10.6% in FY22F and net profit to
decrease by 2.4% yoy, since we expect it to do more promotions during the Covid period
to drive up sales.
? Reiterate Add with a new DCF-based TP of Rmb282.
Airport rental reductions benefit operating margin
In FY21, the Company’s sales grew by 29% yoy to Rmb67.67bn, and net profit rose by
57% yoy to Rmb9.65bn, in line with our expectations. But the sales growth in 2H21 was
dragged down by the pandemic rebound in 3Q21 (sales fell 3% yoy in 2H21 vs. an 84%
yoy increase in 1H21). The Company’s sales on Hainan Island grew by 57% yoy to
Rmb47bn, and its sales contribution improved by 13% pts to 70% in FY21. Sales in the
Shanghai and Beijing airports also declined by 9% yoy and 40% yoy to Rmb12.5bn and
1.9bn, respectively, in FY21, accounting for 21% of total sales. Owing to various
promotions in the Hainan market in 4Q21, particularly for cosmetics products, with lower
margins, the Company’s overall gross margin declined by 7% pts to 33.7% in FY21. The
Company’s negotiations with airports resulted in Rmb3.1bn in rental reductions in FY21,
so the sales and distribution expenses ratio declined by 11% pts to 5.7%. The Company’s
net profit margin improved by 2.6% pts to 14.3% in FY21.
Omicron will have a large impact on 2Q22F sales
Management said the Company achieved over 20% yoy growth in Jan and Feb, for both
sales and net profit. However, the Omicron outbreak had a big impact on sales in Mar,
leading to a 7% yoy 1Q22 sales decline. The Company’s gross margin improved qoq to
34% in 1Q22, and management expects the overall GPM to gradually improve yoy in FY22
through product structure improvement. According to the Hainan government, owing to the
current Omicron outbreak, the number of tourists visiting Hainan dropped by 36% yoy in
Mar after 13% yoy growth in Feb. We expect Hainan’s sales to be lackluster in 2Q22F and
to rebound in 2H22F. We now expect the Company’s sales to grow by 10.6% yoy in FY22F
and net profit to decrease by 2.4% yoy.
Actively exploring long-term growth opportunities
The Company will attract more traffic volume to Hainan Island from areas unaffected by
the pandemic. The phase one project of its logistics center, covering 50k sqm is complete,
which will improve its shipment capacity on Hainan Island. In 2021, the Company
successfully introduced 12 cosmetics brands, 30 shoe and apparel brands, 62 exclusive
products, and 26 limited edition products to meet demand from young consumers. The
Haikou International Duty-Free shopping mall will be opened on 30 Sep 2022, and so far,
the Company has recruited over 500 brands. It now has 22m members in the WeChat app
and aims to increase this to 26m in FY22F. Its member repurchase rate has increased
significantly. The Company won duty-free operation rights for the Suifenhe railway port,
Taiyuan airport and Quanzhou shipping port, and opened new duty-free stores in another
four city airports in Chengdu, Qingdao, Ningbo and Yiwu. The Company also signed
strategic agreements for downtown duty-free stores in Wuhan, Chendu, Xian, Tianjing and
Huzhou. We expect the Company to maintain its leading position in China’s duty-free
market and to attract more traffic volume to Hainan Island.