The company released its results report for the first quarter of 2024. 24Q1 achieved revenue of 18.807 billion yuan, -9.45% year over year; net profit to mother of 2,306 billion yuan, +0.25% year over year; net profit without return to mother of 2,299 billion yuan, +0.15% year over year. The company's profitability continues to be optimized. In the short term, it is recommended to focus on the repair of port channels. In the medium to long term, we are still optimistic about the company's perfect layout in various channels and maintain the purchase rating.
Key points to support ratings
Q1 Revenue was under pressure in the short term, and port channels gradually recovered. 24Q1 achieved revenue of 18.807 billion yuan, -9.45% year over year; net profit to mother of 2,306 billion yuan, +0.25% year over year; net profit after deducting non-return to mother of 2,299 billion yuan, +0.15% year over year. We expect the decline in revenue to be mainly dragged down by duty-free sales on the outlying islands, and port stores are expected to increase their share of revenue as a result of the restoration of passenger flow.
Gross profit margins have increased steadily, and airport rents have been reduced and expenses improved. Thanks to the optimization of the product structure and membership system and the continuous narrowing of discounts, the company's gross margin gradually increased. 24Q1 gross margin was 33.31%, +4.31pct year-on-year, and +1.27pct month-on-month. In addition, the implementation of the airport rent reduction agreement further promoted the improvement of profitability. 24Q1's net interest rate was 12.95%, +1.08pct year over year, and +1.92pct month-on-month.
Outlying Islands Tax Exemption: Short-term sales are relatively lackluster, and construction of new projects is progressing steadily. According to Haikou Customs data, in 1/2/3 of '24, duty-free sales on the outlying islands of Hainan were -43.7%/+2.5%/-32.6% year-on-year, and the cumulative sales volume for January-March was -24.5% year-on-year. Since 23Q2, the Hainan region has severely cracked down on proxy purchasing. Under the influence of last year's high base combined with consumption power that has not fully recovered, the sales growth rate is under pressure in the short term, and the subsequent impact is expected to weaken. At the end of 2023, the company's CDF Sanya International Duty Free Mall Global Beauty Plaza officially opened; the second phase of the Duty-free Shop was renovated and upgraded to open more than 30 high-end international brands, including LV and DIOR; the third phase has completed architectural design and earthwork construction, and the duty-free supply in Hainan has been further expanded.
Port tax exemption: Cross-border passenger flow has been repaired at an accelerated pace, and supplementary agreements have been implemented to ease cost pressure. The company signed supplementary agreements with Capital Airport and Shanghai Airport to reduce the pressure on the company's rent costs and increase the company's profits. In March '24, passenger flow on overseas routes at Shanghai/Capital Airport returned to 82%/50% respectively in '19. As cross-border passenger flow continues to recover, port duty-free sales can be expected to increase.
valuations
The short-term proposal focuses on the rapid recovery of sales through port channels and the increase in profits due to rent cuts; in the medium to long term, they are still optimistic about the company's perfect layout as a leading enterprise in various channels, and it is also recommended to focus on catalysing a new tax exemption policy in the city. We expect the company's 24-26 EPS to be 3.90/4.71/5.63 yuan, with a corresponding price-earnings ratio of 18.4/15.2/12.7 times, maintaining the buying rating.
The main risks faced by ratings
Market competition intensified, the restoration of international passenger flow fell short of expectations, and the recovery of consumer intentions fell short of expectations.