Key points of investment
China Exemption 2024 Quarterly Report: Comprehensive income tax rate decline, gross profit margin and net profit margin both increased. According to China's 2024 quarterly report, the 24Q1 company's revenue was 18.81 billion yuan, -9.4% year over year. We think it was mainly due to the year-on-year decline in sales in the Hainan region; the gross profit margin was 33.3%, +4.3pct year on year. We think it was mainly due to the decline in the share of low-profit taxable businesses, effective control of discount strength, and product structure optimization; sales expenses rate of 12.8%, down 2 pct from 23Q4, mainly due to the new supplementary agreement The proportion of duty-free shops exempted from paying rent at Shanghai Airport and Capital Airport declined; total profit was 2.91 billion yuan, -7.8% year on year, net profit to mother of 2.06 billion yuan, +0.25% year on year, and net interest rate to mother of 12.3%, +1.2pct year on year. We believe that the difference between total profit growth rate and net profit growth rate to mother was mainly due to a decrease in the comprehensive income tax rate due to a decrease in the share of taxable business. 24Q1 income tax accounted for 16.3% of total profit (21.9% in 23Q1).
Channel split: In Q1, sales in the Hainan region declined year on year. Airport offline channel sales are expected to return year on year to the Hainan region. Duty-free sales on Hainan's outlying islands fell 24% year on year in the first quarter. The Hainan provincial government's goal for 2024 is to grow sales at outlying islands by about 10%. According to Haikou Customs supervision data, duty-free sales on the outlying islands of Hainan were about 12.8 billion yuan in 24Q1, -24% year over year, 2.13 million duty-free shoppers, -5% year over year, corresponding customer unit price was 5984 yuan, or -21% year over year.
In terms of airport channels, inbound and outbound passengers continued to recover in the first quarter, and we expect sales at core airport duty-free shops to increase markedly month-on-month. In 24Q1, according to the China Exemption Notice, China Free signed a new tax exemption supplementary agreement with Shanghai Airport (implemented on 2023.12.1) and Capital Airport (implemented in 2024.1.1). The new agreement was readjusted to a duty-free rent model with higher guarantees and commissions. We expect the proportion of rents exempted from payment at Shanghai Airport and Capital Airport to decrease year-on-year in sales under the new model, and the company's sales expenses ratio is expected to decrease.
Duty-free sales on the outlying islands can be expected to pick up during the peak season. The recovery in international passenger flow in 24 will drive the airport's duty-free sales to return to Hainan. At the end of 2023, CDF Sanya International Duty Free Mall Phase II and Area C Global Beauty Plaza will open one after another to improve the luxury layout and enrich the brand hierarchy. The China-China Free Hainan region will further expand duty-free, and incremental effects are expected to be seen. On the airport side, with the further resumption of international flights, international passenger traffic at core airports such as Shanghai, Beijing, and Guangzhou is expected to increase year-on-year in 2024, and airport duty-free sales are also expected to increase.
Profit forecasting
We expect China's net profit to be 7.5 billion yuan, 8.5 billion yuan, and 9.5 billion yuan in 2024-2026, respectively, maintaining the “increase in holdings” rating.
Risk warning
Sales fell short of expectations, policies fell short of expectations, etc.