Matters:

China's 2024Q1 revenue was 18.807 billion yuan, down 9.45% year on year, and net profit to mother increased 0.25% year over year to 2,306 billion yuan. After deducting non-recurring profit and loss, it was $2,299 million. Non-recurring profit and loss is mainly a government subsidy of 8.59 million yuan (closely related to the normal operation of the company) included in current profit and loss. EPS (basic) = 1.11 yuan. In the Q1 quarter, the company's sales expenses increased 17.9% year-on-year to 2,415 billion yuan, with a sales expense ratio of 12.84%, +2.98pct; management expenses +6.54% to 476 million yuan, management expenses ratio of 2.53%, +0.38pct; financial expenses - 125 million yuan, financial expenses ratio -0.66%.

Ping An's point of view:

The company has previously released a performance report. Q1 The company's revenue decreased by 1,962 billion yuan, which is mainly expected to have an impact on the Hainan business (2023Q1 tourism and duty-free shopping, combined with the opening of the Haikou International Duty Free Shop, and the company's revenue reached a record high; the shopping environment in the past era was relatively relaxed, and the company also had inventory accumulated in 2022 to be digested, and the company promoted sales with a certain discount). According to Haikou Customs's 2024Q1 tax exemption amount for Hainan's outlying islands was -24.5% to 12.764 billion yuan (16.898 billion yuan in the same period last year), and the actual number of duty-free shoppers was -4.6% year-on-year to 21.33 million. With the resumption of entry and exit duty-free business, the company's offline business continued to pick up, and part of the reduced revenue from tax exemption on the outlying islands was also replenished by the entry/exit duty-free business.

The company's profit margin level continues to pick up due to various factors. The company's Q1 gross margin increased by 4.31pct to 33.41% compared to the same period last year, and the net margin also increased 1.08pct to 12.95%. At the same time, the company's inventory continued to be optimized, from 27.926 billion yuan at the end of 2022 to 21,057 billion yuan at the end of 2023, and further reduced to 17.593 billion yuan at the end of the Q1 quarter; the number of inventory turnover days dropped from 164.99 days in the same period last year to 138.67 days in Q1, basically returning to 2021 levels.

The company's entry/exit duty-free business resumed, and the Hainan business returned to a normal development trajectory. At the same time, the company continued to improve operations, enhance shopping experience, and raise competitive barriers. In Q1, Pudong Airport's international and regional routes and passengers recovered to 81.92% and 73.49% respectively in the same period in 2019, while international and regional routes and passengers at Capital Airport recovered to 80.88% and 50.39% respectively. Meanwhile, after the Beijing Shangguang Core Airport signed a supplementary agreement with the company for duty-free operation, the deduction rate was greatly optimized compared to 2019. Q1's sales expenses increased 17.9% year-on-year to 2,415 billion yuan, and the sales expense ratio was 12.84%. Purchases in the Hainan market have been tightened since Q2 of 2023, and the base has gradually returned to normal levels. The revenue impact is expected to gradually weaken compared to Q1. In the fourth quarter of 2023, Sanya International Duty Free Mall Phase II LV and Dior opened. After the opening of the Global Beauty Plaza in Zone C, the company continued to improve operations, enrich product categories, and enhance the shopping experience.

Profit forecasting and investment advice. Based on the competitive advantages that the company has accumulated over a long period of time, considering the rapid and steady recovery of inbound and outbound flights and passenger flow since 2023, the company is expected to usher in a gradual recovery in sales as people's willingness to spend recovers and social inventory is digested. We maintain our original forecast. The company's net profit for 2024-2026 is expected to be 74.2, 90.4, and 11.16 billion yuan, respectively. The current market value (based on the closing price on April 23) corresponds to a valuation of about 20.0, 16.4, and 13.3 times PE, respectively. The company is a leading global travel retail company, and there are few comparable domestic companies. Currently, it has been underrated since 2019. Considering the friendly immigration policy, the restoration of international passenger flow at the airport, and the improvement of travel retail sales in Hainan from 2024, it maintains a “recommended” rating.

Risk warning. 1) The macroeconomy falls short of expectations and affects consumer desire. If the macroeconomic environment falls short of expectations, residents' willingness to spend, including travel retail, will be affected, and sales at the company's Hainan and entry/exit duty-free shops may fall short of expectations. 2) Adverse effects of immigration policies and the international environment. If there are adverse changes in immigration policies and the international environment, the flow of customers entering the store, the number of shoppers, etc. will be affected, as well as the layout and planning of the company's related duty-free shops. 3) The market is fiercely competitive. Since the outbreak of the epidemic, categories such as cosmetics, which account for a relatively large share of duty-free sales, have fiercely competed on prices through other channels. If some brands maintain lower prices through taxable channels, it will affect the company's price advantage, which in turn affects sales and profit margin levels. 4) Investment in strategic projects and the risk of management falling short of expectations. The company carries out medium- to long-term planning and project investment around strategic goals. If the environment changes, or approval, construction, bidding, etc. fall short of expectations, there is a risk that strategic project investment and management will not meet expectations.