"Getting more expensive as it falls," is there still a bottom for China Duty Free Group?
On the evening of October 30, $ CTG DUTY-FREE.CN and $ CTG DUTY-FREE.HK officially announced their Q1 2024 financial report. As usual, key data such as revenue and net profit had already been disclosed in the preliminary earnings report, and historically, there is limited incremental information in A-share quarterly reports. Dolphin Investment Research will provide a brief commentary:
1. In the third quarter, the company's total revenue was 11.8 billion yuan, with a year-on-year decline further expanding to 21.5%. The company explained that the accelerated decline in revenue this quarter was mainly due to the frequent typhoons in September and the ongoing issue of insufficient consumer willingness.
According to the sales data for offshore duty-free shopping released by the Ministry of Commerce, the number of shoppers in the third quarter decreased by 27% year-on-year, higher than the previous quarter's decline of 18%, indicating that the typhoons indeed affected consumer spending on the island. However, despite the decrease in foot traffic, benefiting from a rebound in per capita spending, the year-on-year decline in offshore duty-free consumption narrowed by about 4 percentage points to -36% compared to the previous quarter. Although it remains very weak in absolute terms, there is a slight improvement trend on the margin.
However, the revenue decline for China Duty Free Group has expanded on a quarter-on-quarter basis, with possible explanations being the company's sales through airports and other channels may have been more severely impacted by the typhoons, or a worse possibility is that China Duty Free Group is losing market share in the offshore duty-free market.
2. In addition to the accelerating revenue decline, the situation is worsened by China Duty Free Group's gross profit margin also narrowing by 1.9 percentage points quarter-on-quarter, with gross profit decreasing by 27% year-on-year, a decline that is further amplified compared to revenue. Although marketing expenses decreased by over 500 million yuan year-on-year (-19%), due to a larger revenue decline, the marketing expense ratio increased by 0.6 percentage points quarter-on-quarter due to a lower denominator. This ultimately led to a gross sales margin decline of a full 2.5 percentage points to 13.7%, with the gross sales margin declining by 36% year-on-year, exceeding one-third. The sluggish consumption has pressured gross profit while necessitating sustained marketing investment to attract customers, creating a vicious cycle of being caught between a rock and a hard place.
3. In an increasingly difficult external operating environment, due to the rigid and difficult-to-adjust nature of internal expense management in state-owned enterprises, they have lost the "only way out" of relying on strong internal cost control to maintain profits. Specifically, tax expenditures remained flat quarter-on-quarter, and management expenses even increased by 10 million yuan quarter-on-quarter. The net income from interest and foreign exchange, which has become an important contribution to profits, also decreased by 150 million yuan quarter-on-quarter. Ultimately, China Duty Free Group's net profit attributable to the parent company for this quarter was only 640 million yuan, halving by 53% year-on-year. Revenue, gross profit, and net profit are continuously declining at an expanding rate.
Dolphin Investment Research Perspective:
China Duty Free Group, once the brightest retail target during the "internal circulation" era, is now continuously breaking through its bottom line. On one hand, current consumer sentiment is generally low, with typical discretionary duty-free consumption being the first to be affected; on the other hand, as inbound and outbound travel gradually recovers, the resurgence of overseas shopping and direct mail from abroad further diminishes the scarcity of offshore duty-free and airport duty-free shopping; even from this season's financial data, the absolute leading position of China Duty Free in domestic duty-free may also be gradually loosening due to the relaxation of licenses.
Although recent policy initiatives for urban duty-free have been introduced, it will still take time for the business to run smoothly on a large scale, and whether the total addressable market (TAM) for indoor duty-free can compensate for the shrinkage of offshore duty-free remains to be verified, which is akin to distant water failing to quench nearby fire. The duty-free industry currently seems to be looking around for a savior.
From a valuation perspective, although the company's stock has dropped more than 80% from its peak, the company's quarterly profit has rapidly fallen from over 2 billion to less than 1 billion, and this season it is only just over 600 million, making the company "more expensive as it falls." Based on current trends, whether the company's annual net profit can reach 4 billion seems doubtful, while the company's current market value in A-shares remains above 140 billion, making the valuation hard to consider cheap.
The following are key charts:
1. Accelerating decline in revenue
2. Gross profit under pressure, but marketing expenses are passively amplified
3. Harsh external environment, no internal hedging, profits plummet
Dolphin Investment Research [China Duty Free Group] Past Research:
August 30, 2024 Financial Report Review “Falling Again, China Duty Free Group has become a 'Bottomless Pit'”
April 23, 2024 Financial Report Review “China Duty Free Group: Difficult Times, 'Double Kill' is Severe”
March 27, 2024 Financial Report Review “China Duty Free Group: Duty-Free Sales Flat, When Will There Be a Turnaround”
October 27, 2023 Financial Report Review “Revenue and Profits Weak, Is There No Hope for Duty-Free Sales Recovery?”
August 26, 2023 Financial Report Review “China Duty Free Group: Just Browsing, Duty-Free Consumption is Hurt ？”
April 28, 2023 Financial Report Review “Travel Boom, Is Spring Coming for China Duty Free Group?”
March 30, 2023 Financial Report Review “Duty Free Group Endures Adversity, Just One Step Away from a Comeback?”
October 29, 2022 Financial Report Review “In Turmoil, China Duty Free Group's 'Chill' is Expected”
April 23, 2022 Financial Report Review “Revenue Deterioration, Profit Recovery, China Duty Free Group is Still in Hardship”
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