On April 13, China China exemption suddenly collapsed in the afternoon, and then sealed the falling limit.

What happened?

There are several speculations: 1, the purchasing agency circle will be regulated; 2, the mainland will not be quarantined in Hong Kong; 3, the first quarter may not be as expected; 4, the outlying islands will start a price war free of duty; 5, more licenses will be issued

No matter which one it is, it does not have a significant impact on the exemption. The most discussed is the feeling that the first quarter was lower than expected. The revenue is 18.134 billion yuan and the net profit is 2.849 billion yuan, which is much better than that in 2019. Many of this year's Spring Festival is still on the spot.

The collapse of the big white horse of more than 500 billion yuan can only show that the money and confidence of the market are insufficient. It also shows that under the current market background, the valuations of many enterprises are still expensive.

However, in terms of long-term competitiveness, there is no one in the domestic duty-free industry that can play in the eyes of exemption.

Last year, China benefited from the early recovery of China's economy and favorable policies, while overseas was seriously affected by the epidemic. With annual revenue of 52.62 billion yuan, China exemption has surpassed tax-free brothers such as Dufry and Rakuten, and global sales have jumped first.

How should we treat the current exemption in China?

The king of tax exemption

China China exemption was established in 2008, which was reorganized and restructured by travel agencies, duty-free and other businesses and related assets of China Travel Service Group Co., Ltd., and jointly launched by overseas Chinese Town Group.

At the beginning, the positioning of the tourism industry, mainly engaged in travel agency business, duty-free business and commercial complex investment and development business, the three main lines of business can be regarded as going hand in hand.

Among them, the travel agency is responsible for the travel agency, which mainly includes inbound and outbound tourism, domestic tourism, visa services, convention and exhibition tourism, etc.; the duty-free business is undertaken by the China exemption Company, which mainly includes tobacco, alcohol, incense, etc.; the investment and development business of commercial complex is managed by CITIC.

The jump in the tax-free business should begin in 2011.

In March 2011, the Ministry of Finance issued a notice on the pilot tax-free shopping policy for tourists on outlying islands in Hainan. Hainan began the pilot project in April, becoming the fourth area to implement tax exemption on outlying islands after Okinawa, Jeju, Mazu and Kinmen. Seizing the opportunity of favorable policy, the company opened a duty-free shop in Sanya in 2011, participated in the construction of Sanya Haitangwan International duty-free city in 2012, and completed a private offering in 2013, mainly raising funds for the construction of the duty-free city. Sanya International Duty Free City officially opened in 2014, and the company's first overseas duty-free store opened in Cambodia in December of the same year.

Since 2017, the company has stepped up mergers and acquisitions in the tax-free industry.

In 2017, the company acquired a 51% stake in Rishang tax Free Bank (China) and participated in the investment in the Haitangwan Hexin Island project in Sanya. The 51% equity merger and acquisition of the Japanese tax-free bank (Shanghai) in 2018 further consolidated the company's tax-free business at the Capital Airport, Shanghai Hongqiao and Pudong Airport, bidding for state-owned construction land in Haikou City in the same year and began preparations for the construction of an international tax-free city in Haikou City.

The focus will be on tax exemption after 2019.

In 2019, the company formally spun off the travel agency business of CITS and reopened duty-free shops in many cities in China. With the issuance of the "General Plan for the Construction of Hainan Free Trade Port", the company not only acquired a 51% stake in Hainan Duty Free goods Co., Ltd., but also changed the abbreviation of the securities to "China exemption", after the total sea free income.The market share of exemption reaches 91%.Far more than other domestic operators. Firmly sit on the throne of tax exemption.

What kind of industry is duty-free?

What people value when buying things is good quality and low price. If it's the same thing, you can buy it wherever it is more affordable. The advantage of duty-free industry lies in this, due to the exemption of import duties, consumption tax and value-added tax, duty-free goods have obvious price advantages, but also ensure the authentic products.

According to the calculation of Shengang Securities, duty-free goods can create a price advantage of at least 20% by reducing 2-3 taxes.

This model can not be said to cheat, but it is indeed a policy BUFF blessing, and has a certain strategic significance.

The business model of duty-free business in China is that companies with duty-free business licenses purchase duty-free goods directly from brands, then use franchises to sell high-end goods with higher profits, eliminating many intermediate links so as to reduce intermediate costs. to achieve the purpose of promoting consumption return.

According to the World tax Free Association, in 2019, the Chinese consumed 40% of the world's duty-free goods, of which the overall scale of overseas purchases of duty-free goods exceeded 180 billion yuan.

South Korea has become the largest country in the world in the sale of duty-free goods because of Chinese consumption, and many people even fly to South Korea to shopping. According to South Korea's Customs Office, Chinese spent 112.4 billion yuan in duty-free shops in South Korea in 2019, accounting for 73.4 percent of South Korea's duty-free sales.

If we can bring most of the overseas tax-free consumption back to China, it is a considerable consumption figure, and it can also promote the development of related tourism.

SoThe duty-free industry is basically aimed at tourists.Most of the channels are at the entry and exit gates, such as airports, borders, cruise ships, etc., which are divided into two formats: entry and exit and outlying islands, and there are also duty-free shops in the city, but specific licenses are required.From the point of view of the global distribution of retail channels in the duty-free industry, the airport accounts for the largest proportion, accounting for 55.4%.This was followed by intra-city and outlying island channels, accounting for 38.6%, while aircraft and cruise channels accounted for 3.4% and 2.6%, respectively.

Duty-free goods are basically varieties with higher taxes and fees, so they are more competitive.Duty-free goods mainly include tobacco products, wine and spirits, perfumes and cosmetics, fashion products and accessories, watches, jewelry and high-end writing tools, confectionery and food, travel goods and other seven types.

At present, the domestic duty-free market still has a lot of room for development.Global tax-free and tourism retail sales are forecast to be $81.8 billion (about 560 billion yuan) in 2019, according to data released by Generation Research, a Swedish research institute. In 2019, the sales volume of China's duty-free industry was only about 54.5 billion yuan, accounting for less than 10 per cent of global tax-free and tourism retail sales. According to Shengang Securities, it is estimated that the tax-free market space in 2025 is about 1680-230.4 billion yuan.

License plate loosening?

The duty-free industry has high barriers to entry and requires license qualifications. The centralized and unified management and issuance of business licenses by the state, and the qualification for the operation of duty-free goods must be examined and approved by the Ministry of Finance, the State Administration of Taxation, the General Administration of Customs and other departments. The license is scarce and difficult to obtain.

At present, there are only ten duty-free licenses in China, while China has three, namely, China exemption Group, Japan duty-free bank and Hainan tax-free bank. The other seven are Shenzhen duty-free, Zhuhai tax-free, Chinese service tax-free, overseas Chinese tax-free, Wangfujing, seagoing investment and Hainan development. although these seven companies have duty-free licenses, their respective tax-free licenses allow different business areas.Among them, the license plate operators who can operate duty-free business nationwide only have tax exemption and service exemption.

However, from 2020, duty-free license plates will be gradually liberalized.After Wangfujing was granted tax-free operation qualification in June 2020, 12 companies announced in July that they had submitted applications for tax-free operation qualification, most of which were regional retail department stores. Some time ago, Luohu proposed to build a duty-free city to support qualified enterprises to apply for tax-free business qualifications, which is a sign of license loosening.

In the past, the duty-free industry made money from scarce license qualifications.Well, under the current trend of deregulation of license qualifications, will China's exemption face greater competition and its advantages will weaken?This may be an issue of concern to many people.

The first question to be considered is: will the deregulation of licences turn into vicious competition?

No, I won't. At least not in recent years.

The trend of the country to expand and strengthen the duty-free industry can be determined. The duty-free industry depends on policy support. As we mentioned above, the cake is still not big enough. It is obvious that the cake of this industry is bigger together.

However, in a mature market, appropriate competition must be introduced. If an enterprise monopolizes the market, it will bring more laziness, lack of innovation, no sense of crisis, and finally lose competitiveness.

And this competition is more benign, jointly expand the tax-free industry.

Secondly, strengthening will focus on supporting industry leaders and improving their bargaining power with international brands, so that domestic duty-free goods have a price advantage compared with overseas enterprises.As a leader, China's competitiveness is unrivalled.

Relying on the strong background of central enterprises, China China has all-round license plates such as airport, port duty-free shop, outlying island duty-free shop, and tax-free in the departure city, and has an absolute advantage in the head market of airport duty-free and offshore island tax-free. establish its absolute leading position in the tax-free industry.

With strong economies of scale and rich operational experience, China exemption has a strong bargaining power on both the upper and lower ends of the industrial chain, with a gross profit margin much higher than the industry average and a lower expense rate, thus having a wider pricing space. The brand value and cost advantage brought by scale reverse promote the expansion of the company and form a virtuous circle.

With reference to the Korean duty-free market, since 2013, the South Korean government has continuously liberalized the restrictions on duty-free licenses in the city, and the number of tax-free industry entrants has continued to increase, and the number of licenses has increased to 26 at present. However, the increase in the number of license plates does not break the pattern of high concentration in the duty-free market, and the whole market still shows a strong Matthew effect.

According to The Moodie Davitt Report statistics, the total sales of duty-free stores owned by Rakuten, Silla and New World reached 3.3 trillion won in the first quarter of 2019, with a market share of more than 75%, showing a high degree of concentration.

Will domestic tax exemption be hot after the epidemic?

In the first half of 2020, with the gradual improvement of the domestic epidemic situation and the overseas epidemic outbreak, the Hainan outlying island duty-free market accepted a large amount of consumer demand, and the outlying island duty-free market achieved a year-on-year increase of 14%, with sales of 7.49 billion yuan. In the second half of 2020, the new tax-free policy on outlying islands was launched, which not only effectively digested the adverse effects caused by the epidemic, but also seized the good opportunity of returning overseas consumption under the epidemic, further releasing the potential of domestic tax-free consumption, with sales reaching 19.99 billion yuan, an increase of 192% over the same period last year. Since the implementation of the new tax-free policy on outlying islands on July 1, monthly tax-free sales have increased steadily. Tax-free sales in December reached 4.26 billion yuan, an increase of 143% over the same period last year.

It seems that the difficulty of leaving the country due to the epidemic has led to the popularity of tax exemption in Hainan. If the global epidemic alleviates, will the fever in Hainan cool?

According to data from Bank of China Securities, the number of overnight tourists and shopping in Hainan has been increasing from 2012 to 2019, making the penetration rate of duty-free shopping on outlying islands increasing year by year, from 3.19% in 2012 to 5.63% in 2019.From January to November 2020, there were 46.2089 million overnight tourists in Hainan, down 23.2% from the same period last year.The number of duty-free shoppers was 3.839 million, an increase of 14.1% over the same period last year, and the penetration rate of duty-free shopping reached 8.31%.

Therefore, the popularity of Hainan last year was more due to the increase in the popularity of shopping, and the flow of people was lower than in previous years. That is to say,After the epidemic alleviates, the flow of people may be more, and the shopping enthusiasm will be stronger.

At present, Hainan's tax exemption policy for outlying islands has exceeded that of offshore islands and has become the most relaxed policy in Asia.

The duty-free shopping limit for outlying islands has been relaxed to 100000 yuan per person, the duty-free limit of 8000 yuan for individual goods has been abolished, the category of duty-free goods has been expanded from 18 to 45, and the number of shopping for non-island residents has been relaxed from 2 times per year to unlimited times. Purchase and pick up channels are also more diverse and convenient.

In the future, with the deepening of the construction of Hainan free trade port, the duty-free policy on outlying islands is expected to create a new business card of Hainan, so that Hainan can gradually become an attractive international tourist vacation and duty-free shopping destination in Asia and even in the world.

The secretary of the Hainan Provincial CPC Committee said that Hainan received 83.11 million tourists in 2019 and is expected to receive 200-300 million tourists a year in the future. At present, the tourism income of Hainan Province is about 100 billion yuan, and is expected to reach 250 billion-300 billion yuan by 2025.

From the perspective of the development trend of tax exemption in Hainan, tax exemption on outlying islands is indeed the main driving force for the growth of the tax-free industry in the next few years, regardless of revenue scale or profit growth.

In addition to the tax exemption on the outlying islands, the tax exemption business mainly includes tax exemption at the airport and tax exemption within the city. And the layout of online direct mail, but is a cross-border e-commerce channel, need to pay tax.

According to the estimates of Shenzhen and Hong Kong Securities, the net interest rate of the company in various channels is about: tax-free on outlying islands (25% after adding wholesale profits) > intra-city tax-free (20-25%) > online direct mail (15%-20%) > airport tax-free (3%). 6%).

This level of net interest rate also roughly guides the direction of the need for force in the future.

Airport tax exemptionThe market scale of airport tax exemption accounts for the highest proportion of all duty-free channels, and medium exemption is absolutely dominant among them. Of the 65 airports operated by duty-free shops across the country, 58 are operated by the China exemption Department, ranking first in market share.However, the airport duty-free shop has a high deduction point, reaching the standard of 40-46%, limiting the profitability of the company's airport duty-free shop.In the future, it is expected that with the control of the epidemic, the scale of airport tax exemption will pick up quickly.

In terms of tax exemption in the city, with the acceleration of the policy, domestic residents may be allowed to buy before leaving the country in the future, and tax exemption in the city will become a blue sea.

In March 2020, the National Development and Reform Commission issued the implementation opinions on promoting consumption expansion and quality to accelerate the formation of a strong domestic market, which made it clear that it is necessary to improve the policy of duty-free shops in the city and build a number of duty-free shops with Chinese characteristics. At the same time, cities with conditions are encouraged to provide land and financing support for the construction and operation of duty-free shops in the city, and to set up departure pick-up points for duty-free shops in the city at the airport port. Since then, many government departments have repeatedly expressed their support for the construction of duty-free shops in the city, while Wangfujing has been granted a new duty-free license, and the city's tax-free policy is expected to be relaxed.

At present, China exemption is actively arranging intra-city store projects, and has successively opened five intra-city stores in Qingdao, Xiamen, Dalian, Beijing and Shanghai.

For South Korea, where the standard duty-free industry is developed, the scale of the duty-free market in South Korea has exceeded that of airport duty-free, becoming the duty-free channel with the highest share. In 2019, the share of duty-free shops in the city reached 85%. In the long run, the sales scale of duty-free shops in the city is higher than that of duty-free shops at airports.

Conclusion

According to the Wind consensus forecast, the current stock price, China exemption 2021 PE about 50 times. The valuation center for the normal development period of Dufry,2011-2013 is about 35 times. Considering that there is still a lot of room and certainty for the development of exemption, it is also possible to give a higher valuation. But at present, macro, liquidity has a tightening trend, 50 times the attraction of PE is not strong, it belongs to the upper reasonable range.

In the short and medium term, Hainan has a lot of tax-free potential, and in the long run, there is a duty-free pick-up in the city, and its unparalleled competitiveness in the industry is still the best choice for the duty-free industry.