Incident: 1Q24 achieved revenue of 18.8 billion yuan/ -9.5%, net profit of 2.3 billion yuan/ +0.2%, net profit of 2.3 billion yuan/ +0.2% after deducting non-return to mother, which is consistent with previous performance report data.
The revenue side is mainly affected by outlying island duty-free channel marketing. This was partly offset by the restoration of the airport channel, with duty-free sales of the outlying islands of Hainan 12.76 billion yuan/-21% year-on-year in January-March, of which the customer unit price was 5938 yuan/-21% year over year. Affected by the decline in duty-free sales on the outlying islands, we expect the company's duty-free sales in Hainan to drop by about 20%, while the company's overall revenue decline is lower than the decline in duty-free sales on the outlying islands, mainly due to the resumption of duty-free sales at the company's airports. We estimate that other sectors, mainly in Shanghai, contributed about 8 billion yuan to the company's revenue, recovering to 85% of the same period in 2019.
The product sales structure and rent agreement were optimized, and the Q1 profitability improved markedly. 1Q24's gross margin was 33.3% /+4.3pct year over year, reflecting the positive impact of the company's continuous optimization of the supply chain, product sales structure, credit sales policy, and the resumption of port duty-free sales. In terms of period expenses, the sales expense ratio benefited from the optimization of airport rental contracts, which decreased by 2.0pct to 12.84% month-on-month in 4Q23; the management expense ratio was 2.5%, +0.4pct year-on-year. In addition, financial expenses recorded revenue of 125 million yuan, which is narrower than last year's revenue of 310 million yuan. It is expected to be mainly related to changes in exchange rates. After deducting non-net interest rate of 12.2%/+1.2pct year over year, it recorded the best level since 3Q22.
The darkest hour is over, and 2H24 is expected to welcome marginal improvements
Overall, we believe that the period of maximum fundamental pressure on the company has passed, and we are expected to welcome marginal improvements in the future: 1) With the outlying islands duty-free passenger flow remaining stable, we expect that the adverse factors in outlying island duty free passenger unit prices caused by proxy purchasing regulations will gradually be eliminated, and the unit price of outlying islands duty-free is expected to stop falling and pick up in 2Q24 as soon as possible; 2) The complementary effects will become more obvious, especially after the company completes the capital increase to China service delivery; 3) Airport port passenger flow will continue to recover, and the airport duty free will recover in the future. Rental agreement optimization will It brings significant increases.
Investment advice
Looking at the medium to long term, the company is now fully integrated into the core domestic duty-free traffic channel. As consumption recovery progresses, the company's multi-dimensional layout on the outlying islands+airport+online+city will drive continuous growth in performance. It is estimated that in 2024-26, the company's net profit to mother will be 8.2 billion, 9.8 billion, and 11.4 billion, respectively, corresponding to PE of 19X, 16X, and 13X. Considering the company's increased emphasis on shareholder returns, the dividend ratio is expected to increase as performance grows. We believe that the current valuation is relatively cost-effective and maintains the “recommended” rating
Risk warning: Risk that port duty-free sales will resume less than expected; risk that policy progress falls short of expectations.