Core Points - China Duty Free Group and Dufry have won the operating rights for duty-free shops at Shanghai's airports, marking a significant change in the market dynamics [1][2][4] - The operating rights are divided between the two companies, with China Duty Free Group managing the T2 terminal and S2 satellite hall at Pudong Airport and the duty-free operations at Hongqiao Airport, while Dufry will operate at T1 terminal and S1 satellite hall at Pudong Airport [2][3] - This marks the first time in 26 years that Shanghai's airport duty-free market will not have a single operator, introducing competition that is expected to enhance the overall duty-free business [4] Company Summaries - China Duty Free Group is a wholly-owned subsidiary of China Tourism Group and has secured a 5+3 year operating contract for duty-free shops at key locations in Shanghai [2][3] - Dufry, a global leader in the duty-free retail sector, is entering the Chinese mainland airport duty-free market for the first time, with a 3+5 year contract for operations at Pudong Airport [3][4] Market Changes - The new contracts will increase the retail space for duty-free shops, with an additional 1,181 square meters at Pudong Airport and 383 square meters at Hongqiao Airport compared to previous agreements [4] - The new operating model will include a combination of fixed rent and sales commission, which is expected to incentivize operators to introduce more competitive product categories [4]

Investment Rating - The report maintains a "Positive" investment rating for the airport service industry [8]. Core Insights - The introduction of foreign participants in the new round of duty-free tenders at Shanghai Pudong, Hongqiao, and Beijing Capital airports marks a significant change in the competitive landscape [2][4]. - Dufry, a global leader in travel retail, has entered the bidding process, indicating a shift towards a more diversified and competitive market in China's duty-free sector [4][21]. - The bidding rules now allow only one segment win per bidder, breaking the previous monopoly held by China Duty Free Group [14][21]. - The overall commission rates for duty-free contracts are expected to increase unless there is a substantial growth in sales volumes [2][6]. Summary by Sections Duty-Free Tender Competition Intensifies - Major airports in Beijing, Shanghai, Guangzhou, and Shenzhen have seen a significant drop in international passenger numbers from 2020 to 2022, leading to the expiration of restructured duty-free contracts [4][16]. - The new bidding process allows for foreign companies to participate, which is a departure from the previous exclusive operations by domestic firms [14][21]. Changes in Duty-Free Contract Commission Rates - The new contracts at Shanghai Airport utilize a "fixed rent + additional commission" model, which is a high minimum guarantee combined with lower commission rates [6][40]. - If the sales volume at Shanghai Pudong Airport reaches 15 billion yuan, the comprehensive commission rate could drop to approximately 22%, aligning with previous contract levels [6][40]. Airport Fundamentals and Recovery - The airport sector is undergoing significant fixed asset investments due to historical external shocks, with a stable recovery in passenger volumes expected [7][43]. - Airports like Shenzhen, Guangzhou, and Shanghai are projected to have absolute yield value amidst improving mid-term operational data [7][43].

Core Insights - China Duty Free Group (CDFG) reported a decline in revenue and net profit for 2024, with revenue down 16.38% to 56.474 billion yuan and net profit down 36.44% to 4.267 billion yuan [1][2] Group 1: Financial Performance - CDFG's revenue from Hainan decreased by 27.13% to 28.892 billion yuan, accounting for approximately 51.16% of total revenue, down from 58.71% the previous year [2] - The overall duty-free shopping market in Hainan saw a decline, with shopping amounts down 29.3% to 30.94 billion yuan and the number of shoppers down 15.9% to 5.683 million [2] Group 2: Market Challenges - The decline in Hainan's duty-free sales is attributed to factors such as natural disasters, outbound consumption diversion, increased competition from domestic brands, and consumers seeking better value [3] - Despite the challenges, CDFG's market share in Hainan increased by nearly 2 percentage points during the reporting period [3] Group 3: Growth Strategies - CDFG is expanding its airport duty-free business, benefiting from the increase in visa-free countries and the optimization of transit visa policies, leading to significant sales growth in domestic duty-free stores [3] - The company has also won the operating rights for 10 airport and port duty-free projects in the year [3] Group 4: Expansion into Overseas Markets - CDFG is actively seeking new growth opportunities by expanding its overseas presence, opening new stores in locations such as Singapore Changi Airport, Hong Kong International Airport, and Sri Lanka [4] - Recent government policies support the establishment of duty-free stores in qualified cities and promote tax refund services for outbound shopping, encouraging competition in the duty-free market [4] Group 5: Industry Outlook - The increasing number of duty-free players in the market poses ongoing challenges for CDFG, necessitating improvements in supply chain management, channel optimization, and pricing strategies to maintain its competitive edge [5]