China’s duty free sector to quadruple by 2025 – Morgan Stanley report

CHINA. Morgan Stanley is projecting a quadrupling of China’s duty free sales to US$24 billion by 2025 – a sea change in the Asian travel retail landscape with major repercussions for overseas travel retailers.

The report from the investment banker and financial services specialist’s research division – and written by Morgan Stanley analysts Hildy Ling and Edouard Aubin – points out that the growth rate for Chinese duty free is much higher than the 3% CAGR for Chinese overseas luxury spending projected by Bain & Co.

“China represents just 8% of the global duty free market, even though Chinese consumers accounted for a third of global duty free sales in 2018, on our estimates,” Ling and Aubin comment.

Chinese duty free pricing is competitive and could fall further, another key driver of growth, says Morgan Stanley. “Based on our checks, prices of duty free goods at China’s major airports are already comparable to overseas levels. Downtown prices are roughly 15% higher than overseas, but we see room for this gap to narrow as downtown outlets have lower rental costs (15-20% of revenue) than airports (over 40% of revenue), lower labour costs (8% of revenue vs 14% for overseas players) and high gross margins (55%). In fact, downtown duty free prices declined by 10% YoY in 1H19.”

The report mirrors The Moodie Davitt Report’s previously stated view that there will be further liberalisation of duty free policy both on Hainan Island (offshore duty free) and on the Mainland. The Moodie Davitt Report believes it is simply a matter of time before CDFG’s blossoming downtown duty free store network on the Mainland will be opened to Chinese shoppers (only foreigners can shop in them today).

“We expect Hainan’s duty free policy relaxation to continue along with the opening up of the province,” writes Morgan Stanley. “In the medium term, we expect pre-departure downtown duty free to be opened to Chinese outbound travellers, with pick-up at airport arrival halls.”

The report predicts that China duty free will remain a closed market and that its domestic players will share a growing pie. “CITS [CDFG parent company -Ed] is the best stock proxy for China duty free as it has over 90% market share and is expanding in Hainan and downtown markets,” it says. “We upgrade to Overweight and raise our price target by 36%, to Rmb105, to reflect our constructive view of its medium-term earnings outlook.”

Note: Next week’s edition of The Moodie Davitt eZine, out Monday, includes extensive analysis of this landmark Morgan Stanley report. It considers the repercussions of China’s duty free growth on Dufry, DFS Group and the leading Korean travel retailers. It also examines the impact for Chinese airports and on European Luxury Brands

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