Main points of investment

Event: according to the third quarter report of 2022, the company achieved 490 million yuan in operating income in the first three quarters of 2022, down 14.43% from the same period last year; realized return net profit of-98 million yuan, down 78.36% from the same period last year; realized deduction of non-return net profit of-116 million yuan, down 68.84% from the same period last year, with basic EPS of-0.31 yuan. In the third quarter, the company realized operating income of 128 million yuan, down 36.85% from the same period last year; realized net profit of-65 million yuan, down 242.04% from the same period last year; and deducted non-return net profit of-72 million yuan, down 218.62% from the same period last year, and the basic EPS was-0.21 yuan. Overall, revenue and performance declined in the first three quarters compared with the same period last year, mainly due to:

The epidemic situation in Hainan affects people's willingness to travel, and the performance of the road tourism passenger transport industry is weak; after the opening of Hainan passenger transport license, the market competition is fierce, and the company's performance is under short-term pressure. The acquisition of Sea Travel in 2022 is tax-free, which will boost the company's performance in the future.

Comments:

The company's main source of income is road tourism passenger transport, affected by the epidemic, business income and performance continue to be under pressure, year-on-year decline. In the first three quarters of 2022, the company's operating revenue fell 14.43% from a year earlier, and its net profit fell 78.36% from a year earlier. In the third quarter, the company's operating income fell 36.85% compared with the same period last year, and the net profit and non-return net profit decreased by 242.04% and 218.62% respectively compared with the same period last year. The decline in operating income and performance in the first three quarters was due to: from 2022 onwards, the epidemic in Hainan was spread at many points, affecting people's travel demand, and the road tourism passenger transport business was the company's main source of income, so the performance was temporarily under pressure and declined year-on-year. Operating income and performance declined significantly in the third quarter compared with the same period last year, mainly as follows:

In August, the epidemic spread in Haikou, Sanya and other places, and 11 cities and counties, including Haikou and Sanya, successively issued relevant notices to suspend the operation of road passenger transport lines, which had a great impact on the company's business. The superimposed global temporary silent management has a great impact on the demand for summer transportation in Hainan Province, and the company's revenue and performance have dropped sharply compared with the same period last year. As of September 30, 2022, except for Wanning Branch, the other passenger stations have resumed production and operation.

In 2022, the company acquired sea travel with duty-free retail business as its main business, which will contribute to the company's revenue and performance growth. On August 29, SAIC announced that the transaction was priced at 5.002 billion yuan, and the specific restructuring and fund-raising plan can be divided into two parts: the first part: pay 85% of the transaction consideration by issuing shares (the issue price is 11.09 yuan per share). It is proposed to issue a total of 383 million shares) and pay the rest in cash. Part II: SAIC intends to raise additional funds from no more than 35 investors, the number of shares issued shall not exceed 30% of the total share capital before this transaction, that is, no more than 94.8 million shares, and the supporting funds raised shall not exceed 1.8 billion yuan.

This acquisition will help SAIC upgrade from a traditional transportation enterprise to a listed comprehensive tourism company and create a new business card for Hainan tourism. Sea Travel tax exemption was established on July 21, 2020, and was successfully granted a tax-free license on outlying islands on August 12 of the same year. Sanya Sea Travel duty-free city opened on December 30 of the same year. Sea Travel tax exemption has a layout in the four major business sectors: 1) Islands tax Free, Sanya Sea Travel Duty Free City covers an area of 95, 000 square meters, attracting more than 884 international well-known brands. The online mall was officially launched on January 25, 2021; 2) with tax business, except for the duty-free shops in the duty-free city of sea travel, the duty-free members of sea travel were purchased online in August 2021, which is an extension of the duty-free business on the outlying islands of Hainan. Passengers can continue to buy on this platform within 180 days after leaving Hainan; 3) Cross-border e-commerce business is mainly operated by the subsidiary Sea Travel Black Tiger. 4) Sea Travel duty-free Olai City is located in the core business district of CBD, Sanya City, with a total floor area of about 100,000 square meters and a commercial area of about 70,000 square meters. The total number of shops is expected to reach 140 and is expected to open in 2023.

The main source of tax-free revenue of sea travel is tax-free on outlying islands: tax-free revenue of sea travel is 2.443 billion yuan in 2021, while that of 2022Q1 is 1.348 billion yuan, of which tax-free income accounts for 81.24%, and taxable income accounts for 16.94%. The tax-free business on outlying islands is the largest source of tax-free income for sea travel, and its market share has been increasing in recent years. The market share of tax-free business on outlying islands in the first quarter of 2021 and 2022 is 3.58% and 7.44% respectively, which is in the forefront of the industry in the field of tax-free on outlying islands in Hainan. Thanks to the liberalization of the tax exemption policy on outlying islands, the revenue of tax-free business on outlying islands reached 1.769 billion yuan in 2021, accounting for 72.41% of the total revenue. According to the company's announcement on the assessment of tax-free business on outlying islands, operating revenue is expected to reach 3.443 billion yuan in 2022, nearly doubling the growth rate compared with the same period last year. From 2023 to 2025, the operating income will reach 5.144 billion yuan, 6.773 billion yuan and 8.648 billion yuan respectively, an increase of 49.39%, 31.67% and 27.68% over the same period last year.

Sea travel tax exemption in a large discount at the same time quickly make a profit. In 2021, the tax-free gross profit of sea travel was 17.8%, the tax-free gross profit of sea travel during the period was 16.3%, and the tax-free gross profit of 2022Q1 was 16.6%. During the period, the expense rate was reduced to 8.7%, with a net profit of 50 million yuan and a net profit of 3.7%. The minimum discount for duty-free fragrance products of sea travel is basically maintained at 30% or less, and the overall discount is relatively strong among the duty-free merchants. In this context, the company's property rental rate, warehousing and logistics costs and delivery costs are expected to be competitive in the market, which shows that the company has strong bargaining power in the overall supply chain. In the future, it is expected to fill the performance gap caused by the epidemic in the company's road tourism passenger transport business through its strong profitability.

Investment strategy: considering that SAIC Group is expected to integrate resources after merging sea travel duty-free. With the continuous release of tax-free-related policy dividends, superimposed by sea travel tax-free its own resource endowment, the company's revenue and profits will continue to grow, and we maintain our profit forecast. It is estimated that after completion of the injection, the return net profit of Haiqi Group in 2022-2024 will reach 0.48,2.91 and 473 million yuan. Under the circumstances of considering the additional issuance and acquisition of seagoing, and not taking into account the additional funds raised. Maintain a "prudent overweight" rating corresponding to the closing price of 302.0, 50.3,30.9 times PE on October 28, 2022.

Risk Tips:

(1) the epidemic leads to a decline in passenger volume: the epidemic leads to a temporary suspension of production and a decline in passenger volume, thus affecting the company's operating income, and the progress of performance recovery may be lower than expected.

(2) change in the policy of tourist passenger transport license: at present, duty-free license plate is still a scarce resource, but the customs closure policy of Hainan Island in 2025 is not yet clear. If the tax-free license plate is fully liberalized after customs closure, the tax-free license advantage of sea travel will be weakened, affecting the company's future profits.

(3) reinvestment risk: the rate of return of other business sectors reinvested by the company may be lower than expected, affecting the company's earnings.