To The Moon

Key takeaways:

1、China Tourism Group Duty Free Corporation is making a second attempt at an IPO in Hong Kong after shelving its original plan at the end of last year

2、The company’s revenue has grown rapidly since the government eased limits on duty-free shopping on Hainan island in 2020

As restrictions on travel within China are eased, with the latest wave of Covid-19 outbreaks under control, shoppers in the country are flocking to the resort island of Hainan to snap up duty-free goods. And China Tourism Group (CTG) Duty Free Corporation Limited (601888.SH) is wasting no time trying to capitalize on the boom.

China’s largest operator of duty-free shops, which pulled the plug on its plan to go public in Hong Kong just last December amid overall weakness of the equity market in the Asian financial hub, recently filed for an IPO in the city again. The company is reportedly looking to raise $2 billion-$3 billion from the offering, which, if successful, would be the largest in Hong Kong this year. 

CTG Duty Free, which went public in Shanghai in 2009 and operates more than 190 shops, has been the chief beneficiary of a government move to relax limits on duty-free shopping on Hainan in the summer of 2020 as it is dominant in the market.

The company’s annual sales on the island more than tripled last year from 2019, with their share in total revenue growing to nearly 70% from less than 30%. The surge in sales on Hainan have more than offset a hit to airport sales from restrictions on international travel. And as a result, CTG Duty Free’s revenue increased more than 40% to 52.6 billion yuan ($7.8 billion) in the two years, with its net profit more than doubling.

CTG Duty Free first sought an IPO in Hong Kong in June last year, only to cancel the plan six months later because of the resurgence of Covid-19 cases and the overall gloominess of the global economy. Given that the Hong Kong stock market tanked in the following months, it probably was the right call for the company to hunker down and hold off on its IPO plan.

Apparently, many other companies have also refrained from raising funds in the Hong Kong equity market this year. In the first half of this year, only 24 companies went public in the city to raise a total of $2.6 billion, the quietest six months for Hong Kong’s IPO market in nearly 13 years.

Hainan boom

CTG Duty Free’s business looked doomed at the start of the year. The pandemic intensified in China in the first quarter, with big cities including Beijing and Shanghai locked down. This caused duty-free sales to plunge, with shops on land borders and at ports being hit particularly hard.

But as the situation has improved, Chinese authorities have eased travel restrictions across China. Domestic tourism has roared back, with Hainan becoming a hot destination, helped by events like a duty-free shopping festival.

The return of domestic tourism has helped CTG Duty Free’s Shanghai-listed shares rally since early June, although they are still down a lot from a high reached in February last year.

At the same time, however, CTG Duty Free, which had a market share of more than 85% last year, is facing growing competition, especially in its key market of Hainan, as an increasing number of companies throw their hats in the ring.

The company’s new competitors include Zhuhai Duty Free  Enterprises Group, Shenzhen Duty Free Group, Zhongqiao Duty Free and Wangfujing Group (600859.SH), which have receive licenses to run duty-free shops. Also, in May, Hainan Haiqi Transportation Group (603069.SH) said it bought out joint venture Hainan Travel Investment Duty Free Co. to expand in the Hainan duty-free market.

CTG Duty Free’s Shangai-listed shares trade at a price-to-earnings (P/E) ratio of about 44. This multiple may look high relative to compared to 17 for Wangfujing, but it’s far below 77 for Hainan Haiqi.

Growing competition means that CTG Duty Free will have to ramp up marketing and promotions like discounts, which will eat into its bottom line. Still, given the CTG Duty Free’s dominance in China’s hot duty-free market, investors may find it attractive — especially if the company’s Hong Kong stock is priced at a lower multiple than its Shanghai peer.

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