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China's duty-free island shopping boom powers 142% profit surge

State-owned operator captures gains in Hainan from policy change

HONG KONG -- China's reembrace of travel has produced a clear corporate champion: the country's state-owned duty-free shop operator.

China Tourism Group Duty Free announced this week that net profits for the July-September quarter soared 142% from a year before to 2.23 billion yuan ($331.1 million) as revenues rose 39% to 15.83 billion yuan.

"Especially sales of high-margin luxury items such as bags, watches and jewelry increased significantly," the company said in a Shanghai Stock Exchange filing.

The bonanza can be traced to Beijing's move in July to promote domestic travel to Hainan Island by allowing visitors to the country's southernmost province to buy up to 100,000 yuan worth of goods duty-free a year, up from 30,000 yuan. Two months before the rule change, CTG Duty Free went from running half the duty-free shops in Hainan to managing all of them as it acquired 51% of a sister company from its state-owned parent.

The fourth quarter may prove even better for CTG Duty Free.

With foreign travel still largely out of the question due to COVID-19 fears and immigration controls, Chinese made a beeline for Hainan during the eight-day National Day holiday in early October, with visits reaching 146,800, up 44% from a year before.

Sanya, the island's main resort center, was the country's top destination during the break, according to a report by Fung Business Intelligence. Receipts for Hainan's duty-free shops rose 149% to 1.04 billion yuan, according to the local customs authority. Overall domestic holiday travel, by contrast, declined 20%.

"The fourth quarter is a traditional peak season for Hainan tourism, and given the global rebound of the novel coronavirus outbreak, recovery in travel abroad will take more time, and that will add to the benefits CTG Duty Free has been enjoying from the Hainan policy," wrote Changjiang Securities analyst Zhao Gang in a report this week. Even though the company's shares have risen 165% over the past six months, he sees room for further growth and rates the stock a "buy."

Despite the travel rush to Hainan, Hainan Airlines, the province's home carrier, is still in the doldrums. The core unit of cash-strapped HNA Group reported Friday that its monthly domestic passenger traffic declined 40% in September from a year earlier even as the rest of the country's large airlines began to report growth on such routes for the first time since the coronavirus pandemic began.

Until the July rule change, CTG Duty Free was not having a great year, with profits down 72% for the first six months of 2020 and revenues 22% lower. After three quarters, revenues are now down just 3% from a year ago and a consensus of 25 analysts surveyed by QUICK-FactSet shows that for the year they are expected to rise 13% to 54.37 billion yuan with profits improving 4% to 4.82 billion yuan.

CTG Duty Free's performance stands in stark contrast to its main global competitors.

Switzerland's Dufry Group disclosed last week that its July-August sales had decreased by between 75% and 85% from the year before, as more than half its 2,410 global outlets remained closed at the end of the period.

Hong Kong-based DFS Group, owned by LVMH Moet Hennessy Louis Vuitton, appeared to fare little better. Revenues for LVMH's "selective retailing" segment, which combines DFS and the Sephora beauty products chain, dropped 29% in the third quarter to 2.33 billion euros ($2.73 billion) even as the company said that Sephora's revenues had risen.

"DFS saw a significant decline in its activity in most destinations as a result of the suspension of international travel, which is showing no signs of improving," the French parent company said.

CTG Duty Free thus looks likely to cement its position as the largest duty-free shop operator in the world in 2020 after passing Dufry at midyear. Analysts surveyed by QUICK-FactSet expect the Swiss retailer's revenues to fall 55% to 3.97 billion Swiss francs ($4.34 billion).

Dufry shareholders last week approved a share issuance plan that is set to give China's Alibaba Group Holding a stake of 8.5% to 9.99% in the company. The two companies are also to establish a duty-free joint venture in China.

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