Reorganization plan: It is proposed to acquire tax exempt sea travel and transform it into a comprehensive tax-free business. Haiqi Group plans to purchase 100% of HNA's tax-free shares, with transaction consideration of 4,080 billion yuan, of which 3.468 billion yuan in share consideration and 612 million yuan in cash consideration; in addition, it plans to issue shares to no more than 35 specific investors to raise supporting capital, with no more than 1.4 billion yuan in capital raised. Prior to this transaction, the total share capital of Haiqi Group was 316 million shares. After the transaction is completed, the total share capital of Haiqi Group will increase to no more than 724 million shares.

Haiqi Group: Road transport leader in Hainan Province, expanding the “transportation+tourism+consumption” industry chain.

Haiqi Group's main business is automobile passenger transportation, bus terminal development and operation, and comprehensive automobile services: the market share of automobile passenger transport has remained at 40%-50% for many years; in order to cope with changes in the industry, the company actively expanded its comprehensive automobile service business, and its revenue share increased from 4.8% in 2018 to 22.3% in 2022, making it the company's second largest business segment. After the restructuring is completed, the Haiqi Group will transform and upgrade from a traditional transportation enterprise to a comprehensive duty-free commercial enterprise group, focusing on the travel retail market with deep potential.

Outlying Islands Tax Exemption: Policy dividends+two-way supply and demand catalysis still has potential. The dividends of the new duty-free policy are significant. The scale of tax exemptions on the outlying islands grew rapidly, reaching 49.5 billion yuan in 2021, and the CAGR reached 91.5% in 2019-21. Since 2023, due to factors such as weak spending power and crackdowns on proxy purchases, the outlying islands duty-free sales growth has been under pressure. 2023M1-10 was 38.23 billion yuan. We are optimistic about the increase in passenger flow capacity and the performance of passenger flow in Hainan after improving tourist facilities, and the increase in duty-free consumption per capita driven by both supply and demand. We estimate that the sales volume of the Hainan duty-free market in 2023-26 will be 457/555/677/82.8 billion yuan, respectively. Furthermore, after the new duty-free policy, many duty-free shops opened intensively, but licenses are still scarce in the context of limited competition. The market share of the sea travel duty-free business area and location advantages is obvious, and the market share has increased rapidly, and it is now in the second tier.

Tax exemption for sea travel: Tax-free upstart has emerged, covering four major business segments. In June 2020, a new duty-free policy for the outlying islands of Hainan was introduced. Subsequently, Sea Travel Duty Free was established in July of the same year, obtained an outlying islands duty-free license in August of the same year, and its Sanya Sea Travel Duty Free City opened in December of the same year. Sea Travel Duty Free specializes in outlying islands duty-free business, and also covers commercial sectors such as tax, cross-border e-commerce, and outlets: 1) Outlying Islands Duty Free: Offline tax exemption is based on the Sanya Sea Travel Duty Free Mall, which has an excellent location, with a duty-free business area of nearly 50,000 square meters, attracting more than 1,000 internationally renowned brands; the online mall was officially launched in January 2021. 2) Taxable business: In addition to selling taxable products offline through taxable stores in the Sea Travel Duty Free City, it also relies on the four major shopping channels for Sea Travel Duty Free members to carry out online taxable business, which is an extension of the outlying islands duty-free business. 3) Cross-border e-commerce: Heihu, a subsidiary, sells cross-border products, including some consignment business. 4) Olay business: Relying on the travel+duty-free business gene, exploring a new tourism retail commercial complex. The Sea Travel Super Project is adjacent to the Sea Travel Duty Free Mall. The commercial area is about 70,000 square meters, and the total number of stores is expected to reach 140. It has now opened on December 10, 2023.

The sales are impressive, the climb is rapid, and the focus is on the development of the duty-free business on the outlying islands. In 2022, sea travel tax exemption achieved revenue of 3.498 billion yuan/ +39.1%, including outlying islands tax exemption of 2,736 million yuan/ +54.7%, duty-free goods of 583 million yuan/ +7.15%, cross-border e-commerce of 122 million yuan, joint ventures of 36 million yuan; the gross profit margin of the main business was 15.72%/-1.6 pct, and net profit of 56 million yuan to the mother was reversed. 2023Q1-3 Sea Travel Duty Free achieved revenue of 3,012 billion yuan, including outlying islands tax exemption of 2,796 million yuan, duty-free goods of 170 million yuan, cross-border e-commerce of 0.13 billion yuan, and joint ventures of 0.33 million yuan. The scale and share of the outlying islands duty-free revenue showed an upward trend; the gross profit margin of the main business was 19.94%, and net profit to mother was 133 million yuan.

Supply chain capabilities continue to improve, and brand richness continues to grow. 1) With the expansion of business scale and the gradual expansion of channels, the tax-free bargaining power of sea travel has increased, supplementary agreements have been signed several times with the largest supplier Lagardère, and direct procurement relationships have been established with 737 brands. 2) With the improvement of the supply chain, the number of established brands grew rapidly from nearly 350 at the beginning of business to 1055 in September '23. At the beginning of its operation, Sea Travel Duty Free was deeply involved in the fragrance category. Through fragrance drainage, sales of other categories such as accessories and apparel were promoted, differentiated competition quickly seized the market, and many boutique products were introduced to increase investment promotion efforts.

Profitability has improved significantly, and strengthened operations have increased profit margins. As discounts narrowed in 2023, gross margin increased, and 2023M1-9 realized net profit of 67.06% of the forecast value for the full year. However, due to factors such as summer vacation and the peak season in the fourth quarter, the sales performance of the Hainan outlying islands duty-free market in the second half of the year was generally better; in the future, the sea travel duty-free market is also expected to further increase profit levels by optimizing the product structure, adjusting the intensity of discounts, and reducing procurement costs.

Lay out Ole's business and gradually expand outside the province. Sea Travel Duty Free creates a new retail tourism complex and marine travel supersystem to achieve “outlying islands duty-free plus taxable Ole” two-wheel drive. The project is close to the Sea Travel Duty Free Mall and is expected to create a “Gemini” commercial landmark; achieve full product coverage of 1500+ brands, from luxury to department stores, with the ability to absorb high-end business travelers and the local consumer market; products of the same category are presented in the same area in the form of a full shelf, breaking the conventional “rent model” and achieving cost reduction and efficiency. In addition, in March '23, the Sea Travel Duty Free Ole Super Service landed in Yangshuo, and expansion outside the province began.

According to the company announcement, Sea Travel Duty Free's 2023-26 performance promise is to achieve net profit of 1.98, 3.26, 4.80, and 587 million yuan. Based on the Hainan Outlying Islands market performance since 23 and the Sea Travel Duty Free sales situation in January-September 23, we made adjustments based on the performance commitment. It is estimated that Sea Travel Duty Free will achieve net profit of 1.65, 3.29, 4.86, and 589 million yuan in 2023-26.

Profit forecast and investment advice: We expect the net profit of Haiqi Group's original business to be -0.08, 0.17, and 0.41 billion yuan respectively. The closing price on January 17, '24 corresponds to the 24-25 PE of 321 and 132X, respectively. The valuation is much higher than that of comparable companies mainly due to the company's stock price including duty-free business injection expectations. Currently, the company is actively promoting the tax exemption for sea travel. If the restructuring is successfully completed, the duty-free business is expected to inject new momentum into the company's growth. It is recommended to continue to monitor the progress of the company's subsequent restructuring, cover it for the first time, and give it an “increase in wealth” rating.

Risk factors: risks where transactions are not progressing as expected, macroeconomic risks, business-related risks, policy risks.