Description of the event
In the first quarter of 2024, the company achieved revenue of 18.807 billion yuan, -9.45% year on year, net profit to mother of 2,306 billion yuan, +0.25% year-on-year, net profit after deducting 2,299 billion yuan, or +0.15% year-on-year.
Incident comments
On the revenue side, duty-free revenue on the outlying islands of Hainan was under year-on-year pressure. The increase in revenue at port stores offset some of the downward pressure, while the overall revenue side declined only slightly. In Q1 2024, duty-free sales on the outlying islands of Hainan were 12.8 billion yuan, of which the number of shoppers fell 5% and the unit price fell 21%; the decline in shoppers was mainly due to a decline in shopping conversion rates. In the first quarter, Hainan received +16% of overnight visitors. In the first quarter, the conversion rate and customer unit price for duty-free shopping on the outlying islands of Hainan fell at the same time, which may highlight the trend of shrinking consumer spending capacity and willingness to spend.
Port tax exemption, thanks to the increase in the number of international flights and visa-free countries, the number of entry/exit passengers is expected to improve significantly: data from the Civil Aviation Administration of China shows that since 2024, the international aviation market has continued to recover. In February, passenger traffic reached 4.892 million passengers, recovering to 81.8% in the same period in 2019, and rebounded for 3 consecutive months; in the first quarter, passenger throughput of Beijing Capital Airport International & Hong Kong, Macao and Taiwan recovered to 77% of the same period in 2019. 75% and 65% for the same period in 2019.
Product structure and business format optimization led to an improvement in gross margin. The increase in sales and other expenses slightly offset the profit improvement, and the net interest rate increased by 1 pct over the same period last year. The company continues to optimize its product structure, increase the proportion of best-selling products with high gross margin, and increase the revenue share of airport stores with higher gross margin. At the same time, the company's overall gross margin increased by 4.31 pcts, but at the same time, airport store rents were higher, which led to an increase in sales expenses by 2.98 pcts. The final net margin increased by only 1 pct, which is lower than the increase in gross margin.
Net profit from 24Q1 has achieved positive growth on a high base, which is invaluable; looking ahead to the market, the Hainan market will enter a low operating season. Furthermore, considering the uncertainty of the Hainan customs closure in 2025, market sentiment or pressure, and medium- to long-term business advantages, the company is expected to achieve steady growth with the first-mover advantage of channel location, diversified product upgrades, and large-scale procurement.
Profit forecast and investment advice: The company's net profit due to mother in 2024-2026 is estimated to be 79, 91, and 10 billion dollars, respectively, and the PE corresponding to the current stock price is 19, 16, and 15X, respectively, maintaining a “buy” rating.
Risk warning
1. The recovery in passenger flow and sales at the airport port store fell short of expectations; 2. The recovery of tourist traffic and spending intentions in Hainan fell short of expectations; 3. The increase in purchasing and bargaining power with upstream brands fell short of expectations; 4. The readjustment of the airport port rent agreement led to an increase in rents.