Key points of investment

Incident: To implement the rules relating to the comprehensive registration system, Haiqi Group updated its restructuring report. Highlights include:

1) Sea travel tax exemption financial data; 2) Explain the summary of transaction plans and capital raised according to the new regulations list, and increase the sources of cash consideration funds; 3) Comparative performance of maritime travel tax exemption financial indicators with peers, etc.

The core rules of the plan remain unchanged, and it is proposed to purchase Sea Travel Tax Exempt at 5.002 billion yuan. 1) Purchase of assets with cash:

Cash payment of 750 million yuan; 2) Issued shares: 4.252 billion yuan was paid to Hainan Travel Investment for the issuance of 383 million shares at 11.09 yuan; 3) Capital raising: It is planned to raise capital from no more than 35 investors, and the number of shares to be issued will not exceed 94.8 million shares. Ultimately, the company's total share capital is expected to expand to no more than 794 million shares, and the corresponding implied market value of the stock price on March 1, 2023 will not exceed 21,673 billion yuan.

Profits have been corrected, and revenue for the first 7 months of 2022 is close to the level for the full year of 2021. Sea travel tax exemption achieved revenue of 2,398 million yuan from January to July 2022, including 2,008 billion yuan for outlying islands, 344 million yuan for taxable goods, 0.1 million yuan for cross-border e-commerce, and joint venture revenue of 23 million yuan. The overall gross profit margin was 16.59%, and net profit for return reached 64 million yuan, which was corrected. In 2021, revenue was 2,443 million yuan, including 1,769 billion yuan for outlying islands, 544 million yuan for taxable goods, 97 million yuan for cross-border e-commerce, 20 million yuan for joint venture revenue, and an overall gross profit margin of 17.75%.

Converging discounts improve profit levels, and is expected to fully enjoy the dividends of the outlying islands duty-free policy: 1) Discounts have narrowed sharply year-on-year, from 30% off for 3 items in the same period last year to 75% off for 1 item; 2) outlet stores are expected to open within this year; 3) Optimize the supply chain and increase the number of self-purchased brands; 4) The implementation of the duty-free shopping policy will further catalyze the rise in duty-free sales.

Considering that Haiqi Group is expected to integrate resources after merging Sea Travel Duty Free, as outlying islands duty-free dividends continue to be released, compounded by Sea Travel Duty Free's own excellent operating capabilities, the company's revenue and profits are expected to grow rapidly. We expect that after completing the injection in 2023, Haiqi Group's net profit for 2022-2024 will reach 0.30, 405, and 611 million yuan. Considering additional investment and acquisitions from Hainan Travel, and without considering raising supporting capital, it corresponds to 634.4, 47.1, and 31.2 times the closing price PE on March 1, 2023, maintaining the “increase in holdings” rating.

Risk warning: Increased market competition, acquisitions falling short of expectations, risks related to approval, risks related to operations, etc.