Reuters quoted sources as saying that leading duty-free shops in China$China Free (temporary code) (810163.HK) $The Hong Kong listing plan may be officially launched this Friday (August 12), raising more than HK$21.5 billion, which is expected to surpass Tianqi Lithium (09696.HK) (raising HK$13.458 billion) to become the largest IPO in Hong Kong this year.
According to the report, China is exempt from planning to sell 5% of the shares in the Hong Kong IPO. The prospectus price for H shares may be discounted compared to A shares, but no final decision has yet been made. If China Exemption (601888.SH) closes with a market capitalization of about 382.7 billion yuan on the 10th, based on the issuance of 5% H shares, the capital raised for this Hong Kong IPO will reach 19.135 billion yuan (HK$22.222 billion).
The A-share listed company Luzhou Laojiao (000568.SZ) announced last week that it plans to subscribe for 80 million US dollars of H shares as a cornerstone investor. It can be seen that the scale of China's exempt funding is bound to be quite small.
According to the approval of the China Securities Regulatory Commission last year, China can issue no more than 195,247.5 million H-shares. Earlier, there were reports that China is exempt from China to raise 2 billion to 3 billion US dollars.
The funds raised this time will be used to consolidate domestic channels and expand overseas channels, including investing in 8 airport duty-free shops, 20 duty-free shops at other ports and 20 taxable travel retail projects, opening 6 overseas duty-free shops, 11 local duty-free shops, 6 cruise duty-free shops, and the renovation and expansion of the Haikou/Sanya International Duty Free Mall.
It is worth noting that China Express also recently announced on the Shanghai Stock Exchange that the company plans to sign a “Service Procurement Framework Agreement” with China Travel Group Co., Ltd. for services such as property management, transportation, ticketing, promotion and information technology support. According to the announcement, the procurement services under this agreement are all matters related to the company's daily transactions, which meet the actual needs of the company's business operation and development.
According to the prospectus, China's Central Free has the largest number of duty-free shops in the country. As of December 31, 2021, the company is one of nine groups of entities with duty-free business licenses in China, one of five groups of entities with duty-free business licenses to operate duty-free port stores across the country, and is the only group that has a license to operate all types of duty-free shops in China.
The company's business mainly includes selling duty-free and taxable products to domestic and overseas travelers. As of March 31, 2022, the company's brand portfolio includes more than 1,200 brands from around the world, and the company's product portfolio includes more than 316,000 SKUs, including perfumery, fashion and accessories, tobacco, alcohol, food and more.
As of the last practical date, 193 stores were exempt from operating in China, including 184 stores operating in 100 cities in China's 28 provinces, municipalities and autonomous regions, and 9 overseas duty-free shops, including 7 operating in Hong Kong, Macau and Cambodia and 2 cruise duty-free shops. According to Frost & Sullivan, from 2019 to 2021, the airport where the company opened stores alone served more than 2.2 billion travelers.
In terms of financial data, in the first three months of 2022, China's exempt revenue and profit for the period were 16.782 billion yuan and 2,934 billion yuan respectively, with gross margin of 34.3%, both down from the same period last year, mainly due to the decline in sales volume due to travel restrictions.
Over the past three years, China's continuous operations have grown significantly during the record period. For the year ended 2019, 2020 and December 31, 2021, the company's revenue was $48.013 billion, $52,598 billion and $67.676 billion respectively, while the company's net profit was $5.471 billion, $7.109 billion and $12.441 billion respectively. From 2019 to 2021, China's exempt revenue increased at a CAGR of 18.7%, while the company's net profit grew at a CAGR of 50.8%.
According to the prospectus, China's exempt gross margins for 2019, 2020, and the year ended December 31, 2021 were 51.1%, 38.9%, and 32.9%, respectively. The decline in the company's gross margin is mainly due to increased sales costs, including increased tariffs, consumption tax and other related taxes paid on taxable goods, and the use of discounts and promotions.
Notably, in the second quarter of 2022, passenger traffic to Hainan was further reduced compared to the same period last year. According to data from Frost & Sullivan, in the second quarter of 2022, passenger traffic at Hainan Haikou Meilan International Airport and Sanya Phoenix International Airport decreased by more than 60% compared to the second quarter of last year. Furthermore, at the beginning of August 2022, some stores in Hainan will have to suspend operations, including Sanya International Duty Free Mall, which may have a brief adverse impact on the company's business and operating performance.
According to the prospectus, the events of the past two years have brought challenges to the company's stores. As of the last practical date, 26% of the stores that have been temporarily closed since 2019 in China have resumed normal operations, 11% of the company's temporarily closed stores have resumed operations at reduced capacity, and 63% of the stores are still temporarily closed.
Despite the decline in cross-border passenger traffic, China Free still benefits from favorable domestic tax exemption policies, which increased the company's revenue and net profit in 2020 and 2021 against the backdrop of challenges faced by the travel industry.
In terms of industry scale, due to the rapid development of the tourism industry and rising income levels of residents, China's duty-free goods market showed rapid growth from 2017 to 2019, with a compound annual growth rate of 29.4%. In 2020 and 2021, the Chinese duty-free market showed resilience and only declined at a compound annual growth rate of 2.1% from 2019 to 2021 (global and Asian declines of 31.7% and 14.9% respectively during the same period), and still reached RMB 48.1 billion in 2021.
According to the prospectus, the sales market for duty-free goods in China is expected to be RMB 59.5 billion in 2022. Favorable government policies will continue to drive the future growth of China's duty-free goods market. The market is expected to reach RMB 132.2 billion in 2023, with a compound annual growth rate of 27.5% from 2019 to 2023. Assuming the gradual resumption of cross-border tourism, China's duty-free goods market is expected to rise further to RMB 332.9 billion by 2026, with a compound annual growth rate of 36.0% from 2023 to 2026.
In terms of competition, China's duty-free market is highly concentrated and barriers to entry are high. In 2021, the top five duty-free travel retailers in China accounted for 98.5% of the retail market in terms of sales revenue. China Free ranked first among the top five duty-free travel retailers in China in 2021, with a market share of 86.0%.