The company announced its 2023 annual report, and the results were in line with market expectations. According to the company's announcement, in 2023, the company achieved operating income of 67.54 billion yuan, a year-on-year increase of 24.1%, and realized net profit attributable to shareholders of listed companies of 6.714 billion yuan, an increase of 33.5% over the previous year. The company achieved a net profit margin of 9.9% for the whole year, an increase of 0.7 pct over the previous year. Among them, in the fourth quarter, the company achieved operating income of 16.703 billion yuan, a year-on-year increase of 10.9%, and achieved net profit attributable to shareholders of listed companies of 1,507 billion yuan, an increase of 275% over the previous year. The company's net profit margin in the fourth quarter was 9.0%, an increase of 6.4 pcts over the previous year. The gross margin of the company's main business in 2023 was 31.8%, +3.4pct year on year. According to estimates, the gross margin of the main business in the fourth quarter was 32.0%, +11.1pct year on year.

The increase in the share of offline duty-free sales led to an increase in gross margin, and the Haikou International Duty Free City project climbed smoothly and was profitable. By region, the company achieved revenue of 39.65 billion yuan in Hainan, an increase of 14.25% over the previous year, and a gross profit margin of 25.76%, an increase of 0.33 pct over the previous year. The Shanghai region achieved revenue of 17.8 billion yuan, a year-on-year increase of 25.99%, gross sales margin of 23.8%, and a year-on-year increase of 0.86pct. For the full year of '23, Sanya Haitang Bay achieved revenue of 28.4 billion yuan, a year-on-year decrease of 6.2%, and realized net profit of 2.65 billion yuan to mother, an increase of 4% over the previous year. Haikou Duty Free Mall achieved revenue of 6.8 billion yuan, achieved profit for the whole year, and net profit of 32.99 million yuan to mother. The project's climbing progress exceeded expectations. Nisshang Shanghai achieved revenue of 17.8 billion yuan, an increase of 26% over the previous year, and realized net profit of 257 million yuan, or -59% over the same period last year. On the profit side, the gross sales margin of the company's duty-free shops was 39.5%, up 0.08 pct year on year, and the gross margin on sales of taxable goods was about 15.25%, -2.17 pct year on year.

The company's dividend payment ratio exceeded expectations, and the net operating cash inflow reached a record high. According to the “2023 Annual Profit Distribution Plan Notice” announced by the company, as of December 31, 23, the company plans to distribute a cash dividend of 1.65 yuan (tax included) per share to all shareholders. By the end of '23, the total share capital of the company was about 2,069 billion shares. Based on this calculation, the total cash dividend to be distributed was 3.414 billion yuan (tax included). The company's cash dividend ratio for this year was 50.85%, which is higher than the dividend ratio of about 30% in previous years. Net cash flow from the company's operating activities reached 15.1 billion yuan in 2023, compared to -3.4 billion yuan in the same period last year. Net operating cash flow reached a record high in 23 years.

Maintaining a “buy” rating: Sanya International Duty Free City Building C officially opened, and the launch of luxury brands in Haitang Bay marks the entry of Hainan Island travel retail into an era leading in international luxury. The company's supply chain advantages are remarkable in the medium to long term. We believe that the international competitiveness of China's duty-free industry is still gradually increasing, and that the company's card slots enter the core traffic, and port duty-free sales profits are expected to gradually be released as the number of entrants and exits recovers and rents are lowered. Considering the decline in terminal customer unit prices, we slightly lowered our 24-year profit forecast. We expect net profit to be 78.0/9.36 billion yuan (previous value: 84.8/10.38 billion yuan) for 24-25, respectively. The net profit forecast for the additional 26 years is 10.82 billion yuan, corresponding to 23/19/16 times PE for 23-25. In the medium to long term, the company's supply chain advantages are obvious. The restoration of duty-free entry and exit airports and the tax exemption policy within the city are expected to provide an increase, maintaining the “buy” rating.

Risk warning: The terminal conversion rate falls short of expectations, the city's tax exemption policy falls short of expectations, and the duty-free competition on Hainan's outlying islands heightens the risk.