Has the worst time passed? Can China Tourism Group Duty Free Corporation turn bitter into sweet?

On the evening of April 29, $CTG DUTY-FREE(601888.SH) $CTG DUTY-FREE(01880.HK) officially released its Q1 2025 financial report. Since Dolphin Research had just provided a detailed analysis of its annual performance not long ago, and the information disclosed in A-share quarterly reports is quite limited, this time we will only provide a brief quick review:

1. Has the worst passed? Revenue decline narrows: In Q1 2025, the company's total revenue was 16.75 billion yuan, with the year-on-year decline narrowing significantly to 11%. Although the downward trend in revenue has not yet been fully reversed, compared to the 20% revenue decline in the previous three quarters, there are initial signs of stabilization, suggesting the worst may be over.

Looking at the overall data of the off-island duty-free industry, during Hainan's peak tourism season—the most important quarter for the duty-free industry—the number of tourists visiting Hainan Island rebounded to a 6% year-on-year increase. However, the number of off-island duty-free shoppers and purchased items still fell by 28% and 26% year-on-year, respectively, indicating that the conversion rate from "just looking" to actual purchases remains low.

Fortunately, the average spending per off-island duty-free customer rose significantly by 19.5% to 1,153 yuan. With the duty-free product sales structure gradually shifting toward higher-priced goods, although sales volume remains sluggish, the year-on-year decline in off-island duty-free sales this quarter has narrowed to 11%. Compared to the ~40% year-on-year decline in the previous three quarters, this is a significant improvement, further signaling that the worst may be over.

2. Gross margin decline also stabilizes: Alongside the narrowing revenue decline, one of the key issues China Tourism Group Duty Free (CTG Duty Free) faced in Q4 last year—a significant year-on-year contraction in gross margin (mainly dragged down by taxable goods sales)—also showed signs of stabilization this quarter, with a slight 0.3 percentage point drop to 33% compared to the same period last year.

Given the shift in duty-free product sales toward high-end items and the company's efforts to reduce low-margin taxable sales, we believe that, against the already low base in the second half of last year, the likelihood of further significant gross margin erosion is small. There is a good chance it could stabilize or even rebound.

3. Rigid expense structure means profit elasticity is high if revenue recovers: In terms of expenses, the most significant marketing expense this quarter was 2.2 billion yuan, down ~210 million yuan (-9%) year-on-year. The gross-to-marketing spread this quarter reached 3.32 billion yuan, only ~500 million yuan lower than the same period last year when performance was relatively strong.

Other expenses, including taxes, administrative expenses, and R&D costs, also saw a slight ~8% year-on-year reduction in absolute terms, roughly matching the revenue decline, so there was no significant passive expansion in the expense ratio. Ultimately, operating profit reached 2.52 billion yuan, and after-tax net profit attributable to shareholders was ~1.94 billion yuan, down ~16% year-on-year. The net profit margin contracted by only ~0.6 percentage points year-on-year.

It’s clear that CTG Duty Free's expense structure is relatively rigid. Even with significant revenue fluctuations, most quarterly expenses vary within a range of no more than 200–300 million yuan. Therefore, as long as revenue recovers and scale effects rebound, the upside potential for profit is considerable.

4. Notably, to some extent countering the high tariffs imposed between China and the U.S., the Chinese government recently introduced a tax refund policy for departing tourists to encourage direct inbound consumption by foreign residents, bypassing tariffs. Specifically, the new policy lowers the minimum purchase amount for tax refunds from 500 yuan to 200 yuan and raises the cash refund limit from 10,000 yuan to 20,000 yuan. It also encourages the addition of tax refund shops in large commercial areas and pedestrian streets frequented by foreign tourists.

Dolphin Research believes that this new policy has both positive and negative implications for CTG Duty Free. On the positive side, relaxing the refund threshold and ceiling, along with recent visa-free entry policies for foreign tourists, will help expand inbound consumption, which is undoubtedly beneficial for the growth of the departing duty-free industry. On the negative side, allowing tax refund shops in regular commercial areas and pedestrian streets weakens the exclusivity of CTG Duty Free's duty-free licenses and the scarcity of its duty-free stores in airports and Hainan. In other words, it benefits the overall industry but may not favor CTG Duty Free's market share and competitive position.

Dolphin Research's view:

In summary, following what could be described as the worst quarterly performance in history last quarter, CTG Duty Free's results this time, while not yet fully reversing the downward trend, show narrowing declines across all metrics, signaling that the worst may be nearing its end.

Although the number of shoppers and purchase volume in Hainan's off-island duty-free market still show year-on-year declines of over 20%, the recovery of Hainan's duty-free shopping sector still has a way to go. However, thanks mainly to higher average spending, both the overall off-island duty-free sales and CTG Duty Free's quarterly revenue have seen declines narrow to just over 10%.

Moreover, since CTG Duty Free's expenses are relatively rigid, profit shrinks sharply when revenue falls but also rebounds significantly when revenue recovers. Thus, with the revenue decline narrowing noticeably, CTG Duty Free was still able to achieve a net profit of ~1.9 billion yuan during the peak season for duty-free shopping. This breaks the vicious cycle of the previous three quarters, where quarterly profits consistently fell below 1 billion yuan and seemed to "have no bottom." We believe that after this earnings report, the market should not further (significantly) lower its profit expectations for CTG Duty Free in 2025.

In terms of valuation, Wind consensus estimates show analysts' average 2025 net profit expectation for CTG Duty Free at ~5 billion yuan (already revised down from ~6 billion yuan before the 2024 annual report), representing ~18% growth from the 2024 low. This implies some recovery expectations but not an overly ambitious target. CTG Duty Free's current A-share and H-share market capitalizations correspond to 2025 P/E ratios of 25.8x and 19.8x, respectively. While these multiples are not low in absolute terms, Dolphin Research believes the current valuation is roughly neutral compared to CTG Duty Free's historical levels.

So, at this relatively neutral valuation level (i.e., neither particularly cheap nor pricing in much optimism), how should we view the company's future performance?

In the short term, with earnings bottoming out and the government likely to introduce more policies to stimulate duty-free/tax-refund spending by overseas tourists, we can be cautiously optimistic about CTG Duty Free's near-term trajectory.

However, from a long-term perspective, challenges remain, including: ① rising consumer preference for domestic beauty brands over international luxury brands; ② the continued recovery of outbound travel diverting spending from domestic duty-free channels; and ③ the potential erosion of CTG Duty Free's exclusive licensing advantages as Hainan moves toward becoming a fully free-trade port. Given these factors, Dolphin Research remains unconvinced about CTG Duty Free's long-term value and growth potential.

Therefore, if you believe the government will introduce more policies to stimulate duty-free/tax-refund spending or that discretionary categories like beauty and jewelry will rebound strongly, CTG Duty Free may present opportunities. Otherwise, we recommend a cautious and wait-and-see approach.

Key charts:

1. Revenue decline accelerates