In 2023, the duty-free industry, which has been waiting for the full recovery of offline travel, finally &#34;warmed up&#34;.
Duty-free leader China International Travel Service Corporation Limited (601888.SH) recently released its 2023 financial report, finally halting the downward trend that started last year. It achieved annual revenue of 67.54 billion yuan, a year-on-year increase of 24.08%; and a net profit of 6.714 billion yuan, a year-on-year increase of 33.46%.
Compared to the peak year of 2021, China International Travel Service Corporation Limited's revenue only slightly decreased by 136 million yuan, but its net profit decreased significantly by 41.24%.
The reason is that compared to 2021, the rent paid by China International Travel Service Corporation Limited to airports increased. Sales expenses during the reporting period increased by 133.65% year-on-year to 9.421 billion yuan.
On the other hand, in order to clear the squeezed inventory, China International Travel Service Corporation Limited started selling duty-free priced perfumes and cosmetics products online, leading to a gross profit margin of 31.82%, which is 1.86 percentage points lower than in 2021.
In the environment of weak consumption recovery, China International Travel Service Corporation Limited has started a series of adjustments.
On one hand, it renegotiated the rent deduction with airports, further reducing the guaranteed amount and deduction ratio to safeguard profits;
On the other hand, it reduced discounts, adjusted the product structure—reducing perfumes and cosmetics, increasing the proportion of high-end products such as jewelry, to bet on higher-end consumption.
It was learned from sources close to China International Travel Service Corporation Limited that currently, the contribution of perfumes and cosmetics products to the company's revenue in the Hainan market is less than 40%, while in 2021 this number exceeded 60%; the rapidly growing categories are high-end consumption products such as watches and jewelry.
It is not difficult to understand that high-end consumption is less affected by external factors, firmly grasping the high-end consumption power of the wealthy, which is the reason why luxury goods are more resistant to economic cycles.
In the past, China International Travel Service Corporation Limited targeted the middle-class wallets, with over 60% of its revenue contributed by perfumes and cosmetics products. This group has significantly downgraded their consumption after the epidemic, becoming more cautious in their spending.
In a time when consumers use honey for skincare and rely on military coats for warmth, China International Travel Service Corporation Limited capturing higher-end consumption power is almost equivalent to having higher performance certainty.
However, there is still a question for China International Travel Service Corporation Limited: in today's global travel recovery, compared to places like Europe with currency advantages, is Hainan's non-duty-free luxury brand attractive enough to attract high-end consumers?
As of April 1st, China International Travel Service Corporation Limited closed at 87.5 yuan/share, a decrease of over 60% from the beginning of 2023, with a total market value of approximately 180 billion yuan.
<h2>Revenue Structure &#34;Rebalancing&#34;</h2>
In 2023, China International Travel Service Corporation Limited once again adjusted the revenue structure of duty-free and taxable channels, making it difficult for consumers to find the same discount experience online as in Hainan's duty-free stores.
In 2022, the revenue share of China International Travel Service Corporation Limited's taxable channels exceeded duty-free channels for the first time, reaching 51.39%. At that time, China International Travel Service Corporation Limited was selling certain branded goods online through taxable channels cheaper than duty-free channels.
However, in 2023, duty-free channels contributed a total of 44.231 billion yuan in revenue to China International Travel Service Corporation Limited, a year-on-year increase of 69.91%, with a revenue share of 65.49%; taxable channels only contributed 22.345 billion yuan in revenue, a year-on-year decrease of 20.12%, accounting for only 33.08%
Behind the changes in the revenue share of taxed channels is the &#34;rebalancing&#34; of China Duty Free Group's channel revenue structure.
During the epidemic, due to restrictions on international travel, the airport channels in China Duty Free Group's offline duty-free channels suffered severe losses, making its online taxed channels temporarily the second &#34;pillar&#34;.
China Duty Free Group sells goods through platforms such as the &#34;China Duty Free Day&#34; mini-program, following the model of cross-border e-commerce. With the purchasing advantage of being the global leader in duty-free, it has achieved lower selling prices for goods.
However, the cost to China Duty Free Group is a damage to profitability, with the gross profit margin dropping from 40.64% in 2020 to 28.39% in 2022.
Because the essence of China Duty Free Group's taxed business is to sell taxed goods at duty-free prices, the cost of this part of the business is higher, naturally resulting in a lower gross profit margin.
In 2023, the gross profit margins of China Duty Free Group's duty-free channels and taxed channels are 39.49% and 15.25% respectively, with the latter being less than half of the former.
From the perspective of brand owners, they are not happy to see China Duty Free Group's taxed channels account for a high proportion, as the prices of taxed goods from China Duty Free Group may undercut the brand's pricing system. According to research data from Guotai Junan Securities, in 2021, some branded goods sold through China Duty Free Group's online taxed channels were even cheaper than duty-free channels.
In 2023, China Duty Free Group's control over prices is becoming stricter, with online channels gradually becoming specific channels for clearing inventory rather than revenue pillars.
TradeWind01 learned from sources close to China Duty Free Group that considering the balance of online and offline prices, the current pricing of online goods by China Duty Free Group requires the brand's permission, mainly focusing on clearing inventory, aiming to digest the sales of certain limited brands, with a relatively limited range of categories.
This can also be seen from the changes in the gross profit margins of China Duty Free Group's taxed and duty-free channels in 2023: the gross profit margin of taxed channels decreased by 2.17 percentage points year-on-year, while duty-free channels saw a slight increase of 0.08 percentage points.
However, while China Duty Free Group's duty-free channels are recovering rapidly, the rent paid to airports is also increasing.
In 2023, China Duty Free Group's selling expenses increased by 133.65% year-on-year to 9.421 billion yuan, more than double that of 2021, resulting in its net profit being only equivalent to 60% of 2021.
Therefore, on December 26, 2023, China Duty Free Group signed a supplementary agreement with Shanghai Airport (600009.SH) and Capital Airport to renegotiate the discount rate, changing the cooperation model from &#34;low minimum guarantee, capped commission&#34; to &#34;lower minimum guarantee, lower discount rate, but no cap on the discount amount&#34;.
An analyst from a securities firm in East China told TradeWind01 that the new contract implemented since December 1, 2023 is expected to reduce China Duty Free Group's rental pressure, with a positive impact of about 1 billion yuan on China Duty Free Group's profit.
TradeWind01 also learned from sources related to China Duty Free Group that not only Capital Airport and Shanghai Airport, but China Duty Free Group had negotiated with Hainan Airport last year, resulting in a decrease in overall rental costs
<h2>Seizing the Higher-End Consumer Power</h2>
At the beginning of 2023, China's CDFG suddenly found that although people were returning offline, consumption was not picking up.
The trend of &#34;weak recovery&#34; in consumption almost persisted throughout the year 2023.
According to data from Haikou Customs, the amount of duty-free shopping on Hainan's outlying islands in 2023 increased by 25.4% year-on-year to 43.76 billion yuan, while the number of shoppers increased by 59.9% year-on-year to 6.756 million. However, the per capita spending, which better reflects individual consumption ability, on Hainan's outlying islands duty-free shopping decreased by 21.61% year-on-year to 6,477.2 yuan.
A private equity investor in the East China region who has been tracking the consumer industry for a long time told Xin Feng (ID: TradeWind01) that after the epidemic, the middle class actually suffered the most severe damage in terms of consumption power, which happens to be the core consumer group of CDFG, while the impact on top-tier consumption power was not significant.
Apart from cost reduction, the most critical issue facing China Duty Free Group (CDFG) at present is how to increase revenue.
In the current consumption environment, CDFG has changed its approach. Instead of catering to the middle class, it has chosen to increase the per capita spending and has started a series of layouts targeting top-tier consumption power in 2023.
Firstly, in 2023, CDFG launched the &#34;S Store&#34; project, benchmarking the operation and service standards of top luxury brands, targeting high-net-worth individuals to increase per capita spending.
Xin Feng (ID: TradeWind01) learned from sources close to CDFG that in the &#34;S Store&#34; project, the brand's per capita spending has increased accordingly. For example, the per capita spending of Bulgari has been raised from 35,000 yuan to 60,000 yuan. This year, services and management for high-net-worth customers are considered a key KPI by CDFG management.
Secondly, CDFG has also made adjustments to its product structure. It has reduced the proportion of fragrances and cosmetics in its product inventory for sale, and increased the proportion of high-end products such as watches, jewelry, and other boutique items with high per capita spending.
An analyst in the Southwest region's social service industry told Xin Feng (ID: TradeWind01) that in the second half of 2023, CDFG adjusted its product structure by increasing the proportion of high-margin products such as tobacco, alcohol, jewelry, watches, and introducing domestic fragrance brands.
Xin Feng (ID: TradeWind01) learned from sources close to CDFG that in 2021, fragrances accounted for over 50% of sales at the Sanya duty-free store, but in 2023, the proportion of watches, jewelry, and other goods has exceeded that of fragrances, with revenue growth exceeding 50%.
Finally, CDFG has finally brought top luxury brands to Hainan.
In 2023, LV and Dior, two top luxury brands, successively opened in the second phase of Sanya International Duty-Free City on Yunjie Island (formerly Hexin Island). Although the above-mentioned two brands are not in CDFG's duty-free channels, CDFG only gains rental income, but they have a considerable drainage effect on high-net-worth individuals visiting the duty-free city.
Xin Feng (ID: TradeWind01) also learned from sources related to CDFG that luxury brands such as Prada, MiuMiu, and Gucci will also settle in Sanya International Duty-Free City in 2024
Looking towards 2024, the consumption environment facing China's China International Travel Service (CITS) is still not optimistic.
According to data from Haikou Customs, including the peak tourism season of the Spring Festival holiday in January and February 2024, the duty-free sales on Hainan Island decreased by 21% year-on-year to 9.7 billion RMB, while the number of shoppers and per capita consumption decreased by 3% and 19% respectively.
The duty-free track where CITS is located is also becoming crowded.
In 2021, the Swiss duty-free giant Dufry signed a strategic cooperation agreement with Hainan Development Holdings Co., Ltd., planning to develop duty-free consumption business in markets such as Hainan; in the same year, another travel retailer DFS backed by LVMH cooperated with Shenzhen Duty-Free Group to enter Haikou Guanlan Lake to carry out duty-free business.
In this context, changing operational strategies to capture a more scarce and higher-spending crowd is not a difficult choice for CITS.
After all, during the peak tourist season, the wealthy should not mind the ticket prices easily exceeding 20,000 RMB to Hainan

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Financial Report 2024 | China International Travel Service Duty Free Revenue Returned to Growth Last Year, Adjusting Product Structure to Target Wealthy Customers