Incident: China Free released its report for the first quarter of 2024. During the reporting period, the company achieved operating income of 18.807 billion yuan, a year-on-year decrease of 9.45%; net profit of 2,306 billion yuan, an increase of 0.25% over the previous year.
Port channels are expanding steadily, and the renewal of airport rent agreements is expected to reduce costs and release profit margins.
Previously, the company renewed the tax exemption agreement with Shanghai Airport and Capital Airport. Starting from December 1, 2023, the monthly actual fee for Shanghai Airport was calculated using a model where the monthly guaranteed sales commission and the monthly actual sales commission were increased. Capital Airport's operating expenses were adjusted to use a model where both the annual guarantee operating fee and the annual actual sales commission were increased, and the sales commission ratio was lowered to 18%-36%. Nisshang Duty Free is expected to further establish a price advantage after the sales commission ratio is lowered. As international passenger flow restoration compounded by a decline in rents, the company's airport duty-free performance is expected to accelerate.
Outlying Islands Duty Free has been upgraded, and the carrying capacity of Sanya Phoenix Airport Duty Free Shop Phase II and CDF Sanya International Duty Free Zone C has been increased. 1) Sales situation: During the 2024 Spring Festival, Haikou Customs supervised a total of 2,489 million yuan in duty-free sales on the outlying islands, an increase of nearly 60% over 1.56 billion yuan on the 7th day of the 2023 Spring Festival. The number of shoppers was 297,700, up nearly 90% from 157,000 on the 7th day of the 2023 Spring Festival. The per capita consumption was 8,358 yuan. The number of shoppers in 2024 (April 4 to 6) was 5,767 yuan. . 2) Project Status:
In 2023, the second phase of the single-family duty-free shop in the quarantine area of Sanya Phoenix Airport was opened; CDF Sanya International Duty Free Zone C officially opened, specializing in high-end beauty and perfume; the second phase of Sanya International Duty Free City was renovated and upgraded to achieve top luxury brands such as LV (Louis Vuitton) and Dior (Dior) and more than 30 high-end international brands. 3) Passenger flow situation in Hainan: Passenger flow performance in Hainan during the 2024 Spring Festival peak season continued to exceed expectations. Passenger traffic increased steadily after the holiday season. From January to March 2024, the cumulative passenger flow of 7.3854 million passengers at the three airports in Hainan returned to 112.55% in the same period in 2019, up 19.72% month-on-month, focusing on the trend of expanding the base of potential duty-free consumers.
Investment advice: The company is expected to achieve revenue of 815.49/ 1000.71/117.8879 billion yuan in 2024/2025/2026, and achieve net profit of 80.17/98.42/11.661 billion yuan, corresponding to 18.5/15.1/12.7 times PE, maintaining a “buy” rating.
Risk warning: macroeconomic risks; spending power recovery falling short of expectations; geopolitical risks.