The duty-free scale for Hainan's outlying islands during the Spring Festival exceeded expectations. It is estimated that the duty-free scale for the outlying islands will reach 100 billion yuan in 2022. The sales volume of Hainan's nine outlying islands duty-free shops from February 11 to February 14 (four days) during the 2021 Spring Festival holiday will be about 729 million yuan, an average of 182 million yuan per day, and the customer unit price is about 7446 yuan. Among them, duty-free sales were about 660 million yuan, receiving about 99,900 shoppers, an average of 24,500 visitors per day. However, in the same period last year, due to the impact of the epidemic, the sales of duty-free shops on Hainan's outlying islands were only about 16 million yuan.
It is worth noting that due to the impact of the epidemic prevention and control, according to estimates, the average number of visitors received by Hainan during the Spring Festival in 2021 was only about 60% of the 2021 New Year's Day and the 11th holidays of 2020, but the average daily duty-free shop sales increased by 1.25% and 40.19% respectively, exceeding previous market expectations of the duty-free situation during the Spring Festival this year.
Shen Xiaoming, secretary of the Hainan Provincial Party Committee, said that the duty-free share target for Hainan's outlying islands is to reach about 10% of Chinese duty-free consumption by 2022, that is, the scale will reach 100 billion yuan; by 2030, the share will increase to 50%, that is, the duty-free scale will reach 70-80 billion yuan (CAGR in 20-30 is about 39%).
After the company's T2 is put into operation in 2021, the capacity will reach 45 million passages/year, doubling the current production capacity. By the end of 2019, the company's throughput was 24.22 million passengers. It is expected that after the company's T2 is put into operation this year, the capacity is expected to reach 45 million passages/year. It will handle future increases in visitors from Hainan, and there is room for airport traffic to double.
The company has the largest capacity in Hainan and the only gateway airport to the central city.
Since domestic airports, with the exception of Hainan, where outlying islands are duty-free, all other major airports are duty-free, the passenger throughput of international routes at other airports is compared with the total passenger throughput of Meilan Airport. The international route throughput of Capital Airport, Shanghai Airport, and Baiyun Airport in 2019 was 2391, 3851, and 18.71 million passengers, respectively.
Considering the long-term impact of the pandemic, IATA predicts that global international routes are likely to return to 2019 levels as early as 2023, with pessimistic expectations that the timeline may extend to 2025. Therefore, we expect international route throughput at major domestic airports to experience negative growth for several consecutive years compared to 2019 levels. In comparison, the company's throughput is expected to double within three years.
Our opinion was upgraded to a “buy” rating
Hainan is the main return point for duty-free consumption in China. The company is Hainan's gateway airport to the island. There is room for airport traffic to at least double in the past three to five years. Traffic is king at the airport, and traffic flexibility will determine the airport's bargaining power over duty-free operators. As the popularity of duty-free exemptions on the outlying islands of Hainan Province is gradually rising, and the company's new production capacity is expected to take on all of Hainan's incremental visitors in the future, it is expected that the company's bargaining power with duty-free operators will only increase unabated. Based on predicting the duty-free competition pattern based on the share of total duty-free shop operating area in Hainan, we expect the company's market share to be around 6% in 2021, with duty-free sales of 4.5 billion yuan. Adopting the distributed valuation method, based on the 2021 industry average PE calculation, the company's reasonable value was about HK$23.6 billion, and the corresponding target price was HK$49.89. There is room for 25.35% increase from the current price, which was upgraded to a “buy” rating.