We initiate CTGDF with a BUY rating. Even with restrictions related to COVID-19 still in place, we expect the leading position of CTGDF would remain unchallenged thanks to its expansion in offshore stores in Hainan. We expect CTGDF’s continuous investments in Hainan would pay off handsomely and be able to defend against the competition from surrounding regions, thanks to China’s strong support on the region as a free trade port. All things considered, we expect the demand from Chinese residents to purchase duty-free goods in Hainan will remain intact and could be even stronger in 2025 and beyond. Given its natural advantage on travel retail, we believe CTGDF would be among the best positioned in an all-rounded recovery of tourism in the medium term.
　　Key Factors for Rating
　　The worst would soon be over. CTGDF enjoyed a stunning earnings growth between 2019-2021 (CAGR: 60%), but then it faced a challenging business landscape in 2022 due to COVID-19 outbreaks. We believe once China starts to relax the related restrictions, CTGDF’s offshore duty channel should be the first to benefit from an all-rounded recovery. Under our rather prudent base case scenario, CTGDF’s NP may drop 54% YoY in 2022, but in the medium term, its NP should reach RMB14.0bn in 2024, implying a CAGR of 24% between 2020- 2024 with an upside, if the tourism in China recovers faster subsequently.
　　Leading position unlikely challenged if China opens up. We dismiss the concerns that CTGDF may lose its competitiveness if China opens up the border.
　　We believe Hainan would continue to lure more shoppers in China. In contrast, Hong Kong and Korea would lose market share to Hainan, especially after 2025.
　　Long-term prospect intact. The key drivers for CTGDF would be the ramp up of new Haikou project and more details regarding Hainan being a free trade port. These could greatly boost Hainan’s per capita spending on duty-free goods, which was only RMB7.4k in 2021, far from the annual limit of RMB100k.
　　Key Risks for Rating
　　(1) Long lasting travel restrictions; (2) weak spending power; (3) changes in policies and regulations; (4) intensified competition, and (5) changing concession agreements with airport operators.
　　Valuation
　　Our TP of HK$221.0 is based on 30x 2024 P/E (0.7 S.D. below 5-year average of forward P/E) and a HKDRMB rate of 0.90.