China Tourism Group Q3 revenues hold up well despite Hainan shutdown but gross margin slips

CHINA. China Tourism Group Duty Free Corporation (China Tourism Group) posted a -16% fall year-on-year in Q3 revenue to RMB11.7 billion, an +8% quarter-on-quarter rise.

Performance was hit hard by the COVID-related 40-plus day closure of subsidiary China Duty Free Group’s (CDFG) Sanya stores in August and the intermittent shutdown of its Haikou operations, also in Hainan.

The loss in physical store revenue from Hainan was partially offset by enhanced online sales. Net profit attributable to shareholders of listed companies reached RMB690 million, China Tourism Group said.

The opening of the cdf Haikou International Duty Free Shopping Complex will help China Duty Free Group protect its market share in Hainan province, China Tourism Group said
Revenues were robust but gross margin slipped due to the need to focus on online sales during the Hainan shutdown. Source: Goldman Sachs Equity Research. Click to expand.

China Tourism Group said: “During the reporting period, due to the adverse impact of multi-point sporadic and local outbreaks of the domestic epidemic, the company’s operation was greatly affected. In the face of the severe external operating environment, the company actively took effective measures to mitigate the adverse impact of the epidemic.”

China Tourism Group reports its Q3 results to The Stock Exchange of Hong Kong, where it recently completed its secondary listing

Commenting on the opening of the cdf International Duty Free Shopping Complex on 28 October, China Tourism Group said, “The project… is expected to further enhance the company’s brand awareness, consolidate and enhance the company’s comprehensive competitiveness and brand influence in the Hainan Province, the whole country and the global travel retail market.

“In addition, the company’s Duty Zero brand has opened two new in-city concept stores in Hong Kong’s prime district of Central and Causeway Bay, continuing to expand the Hong Kong travel retail market.”

Duty Zero by cdf in Central: The retailer is pledging to deliver a fresh wines & spirits experience to visitors
Duty Zero by cdf in Causeway Bay: Boarding gate design on the store front, with retro décor inside

China Tourism Group noted the importance of improvements to its supply chain capability. “At present, the first phase of the Hainan International Logistics Center has been put into use, adding 50,000 square meters of storage area, greatly improving the richness of goods, the availability rate and logistics and distribution efficiency,” it said.

“During the reporting period, the company continued to promote the modernisation of the supply chain, and the first box ecommerce robot project was launched for trial operation to improve the efficiency of the supply chain.”

Maintaining a ‘Buy’ recommendation, Goldman Sachs Equity Research commented that revenue had proven more resilient than expected.“Despite the operational setback, total revenue came in ahead at RMB11.7 billion, +8% quarter-on-quarter, as the group made up the shortfall at its Hainan stores by online sales, especially on its 51%-owned Sunrise platforms, which we estimate increased by around +20% quarter-on-quarter,” it said.

“This in turn compressed its overall gross margin by -9.3pts quarter-quarter from 34.0% in 2Q22 to 24.7% in 3Q22, as products sold on its online platforms are taxed no different from typical cross-border e-commerce businesses with gross margin generally ~15% below those sold at its physical stores.”

Goldman Sachs said that since the reopening of CDFG’s Haitang Bay store in late September, sales momentum has picked up. However that recovery has not been as rapid as following the Shanghai/Beijing lockdowns in March/April, suggesting widespread consumer caution about travelling amid government recommendations to “stay local” until the end of October.

Commenting on the Haikou opening, the firm said the facility’s highly strategic location next to the Haikou New Port should help CDFG defend its market share against increased competition from Wangfujing Group next year. As reported, department store giant Wangfujing will open in Wanning in 2023.

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