CHINA. China Tourism Group Duty Free (CTGDF) posted an +84% year-on-year increase in first-half revenues to RMB35,526 million (US$5.5 billion) on Friday. Q2 revenues rose +49% to RMB17,932 million (US$2.6 billion). EBIT increased by +592% to RMB8,447 million (US$1.3 billion) and core net profit attributable to shareholders rose +536% to RMB5,265 million.
The results, in line with preliminary figures released in July, underline the world number one travel retailer’s continued strong performance in the key Hainan offshore duty free market. Q3 results, however, will be impacted by the serious COVID-19 Delta variant outbreak which began in late July centered on Nanjing in Jiangsu province.
H1 and Q2 comparisons were skewed by the harsh impact of the pandemic in early 2020. With the crisis continuing to prevent most international travel, offshore downtown duty free sales accounted for 73.8% of CTGDF’s H1 revenues (or RMB26,235 million), up +191% year-on-year.
Of that total, 70.6% was generated by China Duty Free Group’s (CDFG) store in Haitang Bay, Sanya, where sales grew by +210% year-on-year to RMB18,530 million (see Goldman Sachs chart below).
In a note, Goldman Sachs Equity Research said it believed that August figures could be “noticeably weaker”, perhaps down by -30-40% month-on-month due to the recent COVID-19 outbreak. However, it commented that with the situation stabilising in China [there have been only 11 locally transmitted cases since 22 August -Ed], it projects a swift Q4 recovery (+45% QoQ, or +18% yoy) as the peak season kicks in.
Goldman Sachs noted that the number of medium/high-risk areas nationwide had fallen to 1/17, respectively, by 29 August from a peak level of 20/205 early in the month. With Hainan province remaining free from any cases since 5 August, retailers and other industry stakeholders will be hoping the situation continues to improve in the run-up to the all-important October holiday season.
Hainan was declared a low-risk zone on 19 August.
“As the virus situation has already stabilised, we expect CTGDF’s DFS sales to stabilise and recover quickly, as happened around the CNY holiday earlier this year,” the report continued.
“The hotel operators in China (e.g., Huazhu, BTG Hotels) guided that past experiences suggest hotel demand could fully recover within 4-6 weeks and that they expect their 4Q21 RevPAR to return to ~90-95% of 4Q19 level. The key risk again lies on the pandemic situation, as the virus has tended to be more contagious during the colder weather in the winter.”
CDFG’s continued strong performance in Hainan (The Moodie Davitt Report estimates CDFG’s current share of duty free sales at around 92% of the market) has come despite a flurry of new competition since late 2020.
“In Hainan, we still believe CTGDF has competitive advantages over the other new entrants on product variety, procurement costs and store locations, but are mindful that these will narrow gradually,” Goldman Sachs said.
Footnote: China Duty Free Group (CDFG), China’s and the world’s number one travel retailer by sales in 2020, is the exclusive Strategic Cooperation Partner of the Virtual Travel Retail Expo in October (11-15 October with a six-week ‘encore’ period).
The all-digital event, owned by The Moodie Davitt Report (with support from FILTR.QINGWA and co-organiser Hainan Provincial Bureau of Intentional Economic Development), is the follow-up to the successful Virtual Travel Retail Expo in October 2020, where CDFG was a Diamond Partner.
In a hugely exciting development, CDFG is creating its own dedicated digital area in the Expo, called CDFG City, where it will showcase some of its most exciting current and planned projects. A striking gateway presence to CDFG City will feature in both the Hainan Discovery zone and the Retailer Emporium.
The CDFG management, buying, branding and merchandising teams will be out in full force at the Expo, both in CDFG City and also visiting the various brand exhibitors.
