China Tourism Group Duty Free Corp (.SS)_ What’s New from 2024 Citi China Conference; Likely More Promotion in 4Q24E

Summary of China Tourism Group Duty Free Corp (601888.SS) Conference Call Company Overview - Company: China Tourism Group Duty Free Corp (CTG Duty Free) - Market Cap: Rmb141,847 million (approximately US$19,964 million) [3][7] Key Industry Insights - Industry: Duty-Free Retail - Current Trends: - Recent decline in Hainan duty-free sales is narrowing but has not yet shown significant improvement [2][3] - Short-term pressure persists due to weak consumer sentiment [2] - Increased promotions are anticipated during peak season, which may impact gross margins negatively in Q4 2024 [2][3] Financial Performance - Gross Margin: - Management indicated a decline in gross margin for Q3 2024 due to increased promotional activities [3][4] - More promotions are expected in Q4 2024, although the scale may not match the levels seen in 2021 and 2022 [3][4] - Inventory Levels: - Inventory levels are reported to be healthy, with a year-over-year and quarter-over-quarter decrease noted in Q3 2024 [4] - Cosmetics inventory turnover is approximately 3.5-4 months, while fashion goods turnover is around 12 months [4] Strategic Developments - Downtown Duty-Free Stores: - Preparation for downtown duty-free stores is nearing completion, with six CDF stores set to open by year-end [5] - The downtown stores are expected to provide a diverse range of products, particularly fashion goods, and are seen as a necessary complement to airport duty-free offerings [5] Risks and Challenges - Key Risks: - Potential unfavorable duty-free policies, such as increased issuance of licenses and competition from foreign operators [8] - Economic disruptions affecting passenger flows and spending [8] - Loss of pricing advantage due to narrowing price gaps among different sales channels [8] Valuation and Recommendations - Target Price: Rmb79.00, with an expected share price return of 8.7% and a dividend yield of 2.1%, leading to a total expected return of 10.8% [3][7] - Valuation Method: DCF-based valuation with a WACC of 11.0% and a terminal growth rate of 4% [7] Additional Insights - Category Performance: - Mid-end cosmetics brands are facing more pressure, while fragrance products are performing relatively better than skincare [4] - Watches are underperforming compared to fashion goods [4] This summary encapsulates the key points from the conference call regarding China Tourism Group Duty Free Corp, highlighting the company's current performance, strategic initiatives, and the challenges it faces in the duty-free retail industry.