Recent situation of the company
The company's share price has rebounded by 30% in January, and we believe that there has been no significant change in the company's fundamentals and still has long-term investment value.
Comment
Hainan's outlying islands duty-free market showed a bright performance at the beginning of the year and can still maintain rapid growth in the future. According to Haikou Customs, in January 2021, the customs supervised a total of 3.78 billion yuan in duty-free sales on outlying islands, an increase of 144% over the same period last year; during the Spring Festival holiday (February 11 to February 17), duty-free sales on outlying islands were 1 billion yuan, an increase of 261% over the same period last year. Benefiting from the continued positive tax exemption policy on outlying islands, the increase in the number of duty-free stores and operators, as well as brand training, we expect Hainan's overall duty-free sales to maintain rapid growth in the future.
The company's tax-free market share may decline as competition intensifies, but we expect tax-free sales to continue to grow significantly year-on-year. Since December last year, Hainan Province has opened five duty-free stores, including Deep Mission Hills duty-free city and Haikou global boutique (Haikou) duty-free city, with the number of duty-free stores expanded from 4 to 9. Taking into account the increase in the number of competitors on the island, we expect that the company's tax-free sales market share may decline, but benefiting from the rapid growth of the island-wide tax-free market, we expect the company's offline tax-free sales to maintain a considerable growth rate compared with the same period last year, increasing by 94% and 27% to 54 and 6.9 billion yuan respectively in 2021 and 2022.
We believe that the "mail delivery" policy of duty-free goods has a limited impact on the company. The Ministry of Finance and other three ministries issued a notice on increasing duty-free shopping and pick-up methods for Hainan outlying island passengers on February 2, 2021, adding delivery by mail and picking up goods back to the island. At present, operators such as China exemption, Sea Travel and China Service have cooperated with China Post to carry out mailing business. We believe that mail delivery weakens the airport's bargaining power at the pick-up point, but we do not think higher expectations are implied in the current stock price.
The second phase of the expansion project may be put into operation in the middle of the year, and it is expected to undertake the major new air passenger flow in Hainan Province in the next five years. We estimate that the second phase of the company's expansion project will be put into production in mid-2021, and the passenger handling capacity will be increased to 45 million people per year. Considering that the capacity bottleneck of Sanya Airport can not be solved in the short term, we expect that the passenger increment of Hainan Province in the next five years will mainly be undertaken by Meilan Airport.
Valuation proposal
We keep the company's earnings forecast unchanged from 2020 to 2022. The current share price is trading at 20.9 picks, 17.7 times, 2021 and 2022, respectively. It outperforms the industry rating and target price of HK $57, corresponding to a price-to-earnings ratio of 30.3 times 2022, which is 71.2% higher than the current share price. According to the results of the review of the benchmark index and theme index announced by Hang Seng Index on February 26th. Meilan Airport is not included in the new list of Hong Kong Stock Connect. We expect the company to be included in the September adjustment, which, if included, will increase liquidity or catalyze the company's share price to rise.
Risk
The bankruptcy reorganization of HNA Group led to a large impairment of the company (the current information cannot be accurately judged); the duty-free sales on outlying islands were lower than expected; the cost of the second phase increased more than expected.