The company's net profit to mother for the first quarter of 2024 remained the same year on year, in line with previous performance reports. In the first quarter, the company achieved revenue of 18.807 billion yuan/ -9.45%; achieved net profit of 2,306 billion yuan/ +0.25%; achieved non-performance deductions of 2,299 billion yuan/ +0.15%; consistent with previous performance reports.
Revenue analysis: Hainan's tax exemption is expected to be under pressure from a high base, and airport outbound duty-free revenue increased year-on-year.
The total duty-free sales volume of 2024Q1 in the Hainan market was 12.764 billion yuan/ -24.50%. The estimated customer unit price and number of shoppers were -21%/-5%, which significantly dragged down the customer unit price (the 2023Q1 base is the highest, and since then it has gradually been pressured by factors such as the consumption environment and fragrance cycle). Based on this, we expect that the company's duty-free revenue in Hainan will also drop 20-30% year on year in 2024Q1; however, along with the gradual recovery of international passenger traffic, such as duty-free sales at airports, etc., it is expected to pick up year on year.
The gross margin increased by 4 pct in the first quarter, sales rates and financial rates increased, and the effective tax rate improved.
The company's gross profit margin for the first quarter was 33.31%, an increase of 4.31pct. It is expected to be mainly driven by the following aspects: 1) changes in product structure, an increase in the share of high-margin offline product sales (including airport tax exemptions), and an increase in the share of quality products; 2) 2023Q1 Hainan has an impact on inventory processing for some temporary products (higher inventory at the end of 2022), reducing temporary inventory through optimized inventory management to help improve gross margin. At the same time, due to the gradual recovery of airport sales, airport rents also increased compared to last year's Q1, resulting in a sales rate of +2.98 pct; financial rate of +0.83 pct (2023Q1 exchange gains and losses are higher). Furthermore, the effective tax rate decreased by 5.57 pct in the first quarter of this year (related to changes in the share of business with different income tax rates), and minority shareholders' profit and loss decreased (mainly corresponding to daily and overseas sales), so the growth rate due to parent performance was better than total profit (total profit also decreased by about 8%).
With the comprehensive strengthening of central enterprise assessments, management optimization advantages have been comprehensively upgraded, and external environmental challenges have been actively addressed. Although the gradual recovery of consumption and the aromatic cycle still need to be tracked, along with the comprehensive strengthening of central enterprise assessments, the company focused on operating profit performance and comprehensively improving management capabilities: optimizing the category structure; seeking more favorable upstream and downstream cooperation methods; upgrading the digital management of the supply chain and marketing pricing; and actively pursuing optimal capital efficiency and cost ratio optimization to promote the improvement of the overall profit margin level. At the same time, the dividend rate of previous annual reports increased across the board. In the first quarter of this year, revenue was under pressure from a high base, but performance remained flat year on year, which also showed the company's positive attitude of focusing on capital markets and operational optimization. In the long run, the beta cycle is inevitable, and there are iterations in categories, but the company is also gradually moving from simply duty-free circuit premiums to travel retail as the core. It is a full-category, broad-channel, and high-efficiency retail giant, and growth is still expected.
Risk warning: policy risks; macroeconomic and other systemic risks; fragrance category cycle, new project risks, etc.
Investment advice: Maintain a “buy” rating. Maintain the 2024-2026 net profit of 7.734/93.62/10.528 billion yuan, corresponding EPS of 3.74/4.53/5.09 yuan, and PE valuation of 19/16/14x.
Although there are still challenges in the external environment, with the comprehensive strengthening of central enterprise assessments, the company's subjective momentum has been comprehensively strengthened, actively building a leading omni-channel and efficient travel retail operator in all categories, and maintaining a “buy” rating.