China has released its 2024 quarterly report. The company expects to achieve revenue of 18.8 billion yuan/9.45% year-on-year in Q1 of 2024, including operating profit of 2.91 billion yuan/7.8% year-on-year decrease, achieving net profit to mother of 2.31 billion yuan/0.25% year-on-year increase, and net profit of 2.30 billion yuan/0.15% year-on-year increase.
Comment:
1. Under a high base, the outlying islands have declined duty-free, and airport revenue has steadily recovered. The 2024Q1 company's revenue of 18.8 billion yuan is basically in line with market expectations. According to Haikou Customs data, the revenue of the Hainan region was about 115-12 billion yuan, a year-on-year decrease of 20%-25%. The main reason was that the epidemic had just been liberalized last year, and the Hainan base was high due to retaliatory spending by tourists. The airport channel achieved sales of 7 billion dollars, a sharp increase of 30%-35% over the previous year, benefiting from the gradual recovery of offline passenger flow.
2. Gross profit margin improved month-on-month, and airport rent reduction and improvement expenses. The gross margin of 2024Q1's main business was 33.3% (up from 32.7% of the performance forecast), an increase of 4.3 percentage points over the same period last year and an increase of 1.3 percentage points over 2023Q4. Benefiting from the further recovery of the entry/exit duty-free business, the share of the company's offline business continued to rise, and the product sales structure continued to be optimized.
2024Q1's sales expense ratio was 12.8%, up 2.9 pct year on year, down 2.1 pct from month to month. The main reason was that there was less international passenger flow in the first quarter of last year, less guaranteed rent according to the agreement, international passenger flow rebounded in the fourth quarter of 2023, and airport rents were higher; starting in the first quarter of 2024, Beijing-Shanghai Airport deducted 25%-30% of offline sales in accordance with the new rent agreement, saving a lot of rent expenses.
The 2024Q1 management fee rate was 2.5%, an increase of 0.4 pct; financial expenses - 125 million yuan, compared to the same period last year - 310 million yuan. The year-on-year increase was mainly a decrease in exchange earnings this year. 2024Q1's net profit margin was 12.3%, up 1.2 pct year on year and 1.3 pct month on month, mainly improving gross margin, saving rent costs, and falling income tax rates.
3. The average daily duty-free sales on the outlying islands of Hainan in Qingming are 90 million. During the three days of the Qingming holiday this year (April 4 to 6), Haikou Customs supervised a total of 271 million yuan in duty-free sales on the outlying islands, with 47,000 shoppers and a per capita consumption of 5,767 yuan. Since the Qingming holiday was only one day on April 5 in the same period last year, the data was not comparable, but the average daily sales level was lackluster.
4. Investment suggestions: The company's Q1 profit improvement is mainly due to cost optimization due to airport rent cuts, and income tax reduction brought about by the company balancing the costs and profits of various subsidiaries through the supply chain. Short-term corporate stock price pullback is still Hainan gradually entering a low season, and sales are weakening month-on-month. Looking ahead, the duty-free base on the outlying islands of Hainan will gradually decline. Combined with the increase in passenger traffic in Sanya during the May 1st peak season, duty-free sales in Hainan are expected to gradually improve; with the rapid increase in international flights on the airport side, the increase in international passenger traffic at the airport will lead to an increase in offline sales and cost dilution, and airport rent cuts will greatly increase profits; in addition, international passenger flow will return to a certain extent, and the city store policy is expected to be introduced. It is recommended to continue to pay attention. The company's net profit for 2024/2025 is estimated at 78.7/9.21 billion yuan, and the corresponding PE valuation is 19x/16x.
Risk warning: the epidemic is repeated, domestic and foreign passenger flows continue to be sluggish; macroeconomic growth is declining; competition in Hainan's duty-free market heightens risks; policies fall short of expectations.