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Asia's duty-free shops battered as coronavirus freezes air travel

Chinese state-owned CITS suffers heavy loss while DFS undergoes restructuring

TOKYO -- Duty-free shops are taking a beating as travel restrictions to contain the coronavirus leave airplanes grounded and airports closed, a sharp turnaround for what was a growing and lucrative industry before the pandemic.

China International Travel Service, or CITS, saw a dramatic reversal of its fortunes. The largest duty-free shop owner in China announced on Thursday that its revenue for the first quarter dropped 44% year-on-year to 7.63 billion yuan ($1.08 billion), swinging to a 120.14 million yuan net loss from a profit of 2.30 billion yuan a year before.

The Shanghai-listed company's disclosure in its filing to the exchange was rather straight forward. "The customer source for the company's duty-free shops drastically decreased, due to the influence of the novel pneumonia epidemic." As the company spun off its travel agency business to its parent last January to remove competition among the group, it has come to concentrate on the duty free sector.

Zhao Gang, analyst at Changjiang Securities, pointed out in a note on Thursday that the company had to run "promotional activities in some stores to pump up sales" which added to its loss, while impairment provisions on inventory tripled from a year ago.

The Beijing-based company operates over 200 duty-free stores across all Chinese provinces, autonomous regions and major cities, on top of a few in Cambodia. It was enjoying record growth, especially in recent years as more people were traveling in and out via airports, berths, border checkpoints, bus terminals and railway stations where it had opened its stores. Adding to its shop portfolio, the state-owned enterprise was granted a 10-year concession at Daxing International Airport, the new second aviation hub of Beijing.

The trade was quite lucrative, as it is a licensed business. CITS gross profit margin in 2019 was 50%, while annual net profit last year grew 50% to 4.62 billion yuan. But now, the company said it is "closing down and trimming operating hours" in some of its shops, without elaborating further.

DFS Group is in a similar state. The Hong Kong-based company is one of the largest travel retailers in the world, but it is privately held and no stand-alone public financial disclosure has been made. However, its majority owner LVMH gave a glimpse of its situation.

Christopher Hollis, director of financial communications of the French company, said in a conference call on April 16 that "there was a strong decline in revenue due to the significant decrease in travel" for the duty free chain that it owns.

DFS falls under the "selective retailing" section in LVMH's earnings disclosure, alongside cosmetics and beauty products chain Sephora. The revenue of the segment was down 25% to 2.626 billion euros ($2.84 billion) in the first quarter.

The mood, however, turned bleak only recently. Bernard Arnault, chairman and CEO of LVMH, was still optimistic in his February letter to shareholders. Despite being affected by a slowdown in Hong Kong tourism since last summer, DFS was doing fine in Europe, he said, pointing out that "Galleria in Venice continued to perform very well." Arnault was also hopeful that "We can count on the strength of our brands and the agility of our teams to reinforce, once again in 2020, our leadership in the universe of high-quality products."

Such optimism has now been put aside, at least for the time being. Jean Jacques Guiony, LVMH's chief financial officer, refrained from making any guidance as to whether DFS will dip into a full-year loss at the conference call, but he stressed that "we are taking tough measures to reduce the cost base. I mean by all costs -- overheads, rental, shop, apparel and everything." The cuts, he said, will be in "excess of 20-25%."

South Korean operators are not immune from the turmoil. Hotel Shilla, a Samsung group company, said on Friday that its duty-free business fell to an operating loss of 49 billion won ($39.8 million) in January-March, from a 82.2 billion won profit the year before, on a revenue drop of 31%. Combined with the widening loss in its hotel and leisure business, the company as a whole swung to an operating loss in the first quarter.

The Seoul-based operator runs shops in major airports in the country and in the region, including Hong Kong, Macao, Singapore, Tokyo and Phuket, most of these airports currently closed or semi-closed. However, the company did not reveal much about the outlook in its Friday disclosure, merely saying it would "minimize the impact of COVID-19 through well-prepared responses to both internal and external threats."

For NWS Holdings, a listed subsidiary of major Hong Kong realtor New World Development, the duty-free business was already under review, due to the unrest in the territory since last summer. NWS said in the its interim report published in mid-March that its duty-free shop operations "remained under pressure, attributable to the drop in the number of passengers and visitors triggered by the public activities" -- a euphemistic phrase used by Beijing-friendly business interests to refer to the anti-government protests.

Indeed, the facilities management segment of the company, which also includes convention center and hospital operations, remained the largest loss-making section of its business portfolio during the six months until last December. The company has already closed an outlet in Macao and discontinued its concession in the territory's airport last year.

LVMH, the DFS majority owner, decided on April 15 to propose a 30% reduction in the dividend announced on Jan. 28, to be voted on at the annual shareholders' meeting at the end of June, reflecting the deteriorating business environment due to the pandemic. The decision would drag the annual dividend to 4.80 euros per share, a 20% cut from the year before.

CITS, on the other hand, seems to be unfazed by the current situation, judging by the dividend policy announced alongside its substantial quarterly loss. The board recommended an annual cash dividend of 0.72 yuan per share, or 31% more than last year. Even though the payout ratio is 4.3 points lower than a year before, it is still above the 30% benchmark recommended by the local securities regulator.

In its annual report, which was disclosed simultaneously with its quarterly earnings on Thursday, the state-owned company did not mention the pandemic in its annual business plan or list of risk factors. It did, however, stress adherence to Chinese President Xi Jinping's rule by "deeply studying and carrying out" the leader's policies as "the guiding ideology of the company's operation in 2020."

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