Profitability improved year-on-year in the first quarter, and the improvement trend is expected to continue throughout the year
China's free 1Q24 achieved revenue of 18.807 billion yuan (yoy -9.45%), net profit of 2.06 billion yuan (yoy +0.25%), deducted non-net profit of 2.299 billion yuan (yoy +0.15%), a year-on-year increase of 1.17pct, in line with the rapid performance report. The year-on-year decline in revenue was mainly affected by Hainan's consumption environment and high base factors. Factors such as the increase in offline sales with high gross margin, the convergence of discounts in Hainan, and the re-signing of airport rents effectively contributed to the recovery in profitability. We expect the 24/25/26E EPS to be 3.75/4.41/5.03 yuan, and the target price is 93.75 yuan (corresponding to 25x24PE, with reference to the comparable company Wind, which is expected to have an average PE value of 18X in 24 years. Airport rent relief, opening of reserve projects, local store policies or catalytic market sentiment, the company's size/operation/supply chain has a clear first-mover advantage) and “buy”.
Gross profit margin is rising steadily, and inventory turnover is optimized
According to Haikou Customs, the 1Q24 outlying islands had duty-free sales of 12.76 billion/ -24% yoy. According to the boarding announcement, the international passenger traffic throughput of Shanghai's two airports reached 7.9 million passengers in the 1st quarter, and international passenger traffic at Pudong Airport recovered to 75% of the same period in '19. We expect duty-free shops to account for about 60-65% of revenue from outlying islands in 1Q24, and the share of offline revenue at airports to increase to 10-15%, benefiting from a moderate recovery in airport passenger flow and consumption power. 1Q24 gross profit margin was 33.3%, up 4.3pct year on year (VS1q-4q23 was 29.0/32.8/29/ 32%), rising steadily. With the structural optimization of sales categories, the results of the adjustment of the membership points system are gradually showing, price competition is easing, and temporary inventory is eliminated. We expect gross margin to maintain a year-on-year improvement trend. 1Q24 inventory turnover days 139 days/yoy-26 days, optimized inventory management.
Actively create benchmark quality projects to optimize the consumer experience
The 1Q24 sales expense rate/management expense rate/financial expense ratio was 12.84/2.53/ -0.66%, +2.98/+0.38/+0.83pct year over year, -2.01/-1.47/+1.05pct. Net profit margin was 12.3%, yoy+1.2pct. The year-on-year increase in the sales expense ratio was mainly due to increased marketing and promotion efforts in the early stages of the opening of Haitang Bay Building C. The 1Q23 airport store had a small operating area, and airport rents were still on a low base; the significant month-on-month improvement was mainly due to the positive impact of the airport rent deduction adjustment in December 23. Looking ahead to 24 years, the company will continue to enhance the level of refined management and operation, and the “S Store” project, which targets the operation and service standards of first-tier brands, will continue to advance in 24 years. At the same time, the company is progressing key projects in a steady and orderly manner. As of March '24, the Haitang 6.265 billion yuan bay phase 1 hotel has partially advanced ground structure construction; Haitang Bay Phase III has completed the design of the construction plan; and the construction of Haikou International Duty Free City plots 1-3 is progressing in an orderly manner.
The target price is 93.75 yuan, maintaining the “buy” rating
We expect the 24/25/26E EPS to be 3.75/4.41/5.03 yuan, and the target price is 93.75 yuan (corresponding to 25x24PE, with reference to comparable company Wind, which is expected to have an average PE value of 18X in 24 years, airport rent relief, opening of reserve projects, local store policies or catalytic market sentiment, and a clear first-mover advantage in the company size/operation/supply chain) to maintain “buying”.
Risk warning: Risk of changes in tax exemption policies, increased risk due to market competition.