Incident: The company released its 2024 three-quarter report. In the first three quarters, the company achieved revenue of 43.02 billion yuan/1 -15%, net profit due to mother of 3.92 billion yuan/year on year -25%, net profit after deducting non-return to mother of 3.87 billion yuan/year on year -25% due to poor performance in the Hainan market, and the decline in Q3 revenue increased. The company achieved revenue of 11.76 billion yuan/-22% in Q3. The decline was larger than in Q1-Q2 and lower than our expectations. Among them, we expect that the weakness of the Hainan channel is still the main reason for the decline in revenue. According to Haikou Customs data, duty-free sales on the outlying islands of Hainan fell 36% and 31% respectively in July-August, mainly due to a 21% and 45% drop in shoppers. Furthermore, due to weak physical consumption, we expect Q3 companies' sales from other channels (airports, ports, and tax-paid e-commerce) to remain flat or decline slightly year-on-year.

Due to changes in operating leverage and channel structure, gross profit margin and net margin are under pressure. The company's gross profit margin for the first three quarters was 32.57%/+1.0pct year on year, but due to weak demand side, Q3 recorded a gross margin of 32.0%, or -2.5pct year over year. Furthermore, due to the company's relatively high fixed costs in the Hainan market, the net interest rate was clearly under pressure, offsetting the positive impact of the adjustment of the airport rent agreement. The overall period cost ratio was 20.8% /+0.9 pct year over year, of which the sales/management expenses ratio was +0.6 pct/+0.4 pct year over year. Affected by this, the company's Q3 net interest rate was about 5.7% /-3.2pct year-on-year, driving the company to record 0.63 billion yuan/-53% year-on-year after deduction of non-net profit in Q3.

Endogenous management capabilities are still being optimized, focusing on incremental opportunities brought about by improvements in the external environment and implementation of the city's store policy. On August 28, five departments including the Ministry of Finance issued the “Notice 1 Notice on Improving the City's Duty Free Shop Policy”, which allows the company and 18 Chinese and Chinese duty-free shops in China's holding and participating companies to operate duty-free shopping before leaving the country. We have previously estimated that duty-free shops in Beijing and Shanghai are expected to increase the market by 10-30 billion in the mature stage, and it is expected that the implementation of this policy is expected to bring new growth space to the company. In addition, the company continues to promote supply chain optimization and expand overseas markets. In the first three quarters, 165 brands were introduced, with Chinese brands accounting for more than 40%. At the same time, the company continues to expand new sales channels. Currently, it has teamed up with Chow Tai ?$#@$ to open a duty-free jewelry counter in Tokyo and cooperated with MCM Group to operate MCM trendy boutiques. Investment advice: Considering that duty-free sales performance on Hainan's outlying islands on the National Day is still under pressure, and that the trend in Chinese demand for high-end consumer goods is still unclear, we lowered our previous profit forecast. The company's net profit for 2024-26 is estimated to be 49.4, 69.8, and 8.28 billion yuan, respectively, and the corresponding PE is 28X/20X/17X, respectively. In the medium to long term, the company is still a leader in the domestic duty-free industry. It has a perfect channel layout and clear competitive advantage, and maintains a “recommended” rating.?

Risk warning: The risk that the effects of the local store policy will fall short of expectations; the risk that the macroeconomy will continue to decline.