Action
　　We believe the duty-free shopping (DFS) business is a key earnings growth driver for Beijing Capital International Airport (BCIA). We think the firm’s international passenger traffic has started to recover, and expect per-passenger DFS spending to increase significantly along with improving product categories and strength of DFS operators. In addition, it is possible that BCIA’s DFS contracts may remain largely stable without significant revisions. We believe that earnings contribution of the DFS business in 2024 may surpass pre-pandemic levels.
　　Reasoning
　　We think BCIA’s international passenger traffic in 2024 will rebound to over 70% of pre-pandemic level. We think sector international passenger traffic will recover to over 40% and 90% of the 2019 level in 2023 and 2024. We think COVID-19 conditions may delay overseas airlines’ shift to Beijing Daxing International Airport. Under optimistic, neutral, and pessimistic scenarios, we estimate that Daxing airport may divert 18%, 24%, and 37% of international passenger traffic from BCIA.
　　We estimate per-passenger DFS spending at BCIA will rise 40% to Rmb430 in 2024 compared with 2019. COVID-19 conditions weighed on DFS business development. Compared with pre-pandemic levels, we expect per-passenger DFS spending to increase along with subsiding COVID-19 conditions. We see momentum from improving strength of CTG Duty Free, enhancing quality of client base, and optimization of product categories (sales contribution of premium brands likely to rise from single digit to about 30% like in overseas airports).
　　We think it is possible that BCIA’s DFS contracts may remain largely stable without significant revisions, and see marginal improvement in connected transaction with BACT. BCIA has not finalized its model for DFS rental. In our view, it is possible that BCIA’s DFS contracts may remain largely stable without significant revisions, considering the steady rebound in international travel and the common practices of overseas airports. In addition, BCIA entrusts the operation of the DFS business to Beijing Capital Airport Commercial & Trading (BACT), and this constitutes the largest connected transaction cost. However, we believe the latest contract between BCIA and BACT has improved. Even if incremental sharing resumes, we think the potential impact may be milder than the market expects.
　　Financials and valuation
　　We revise our 2022 earnings forecast from a loss of Rmb2.47bn to a loss of Rmb2.69bn due to sharper-than-expected impact on travel in 4Q22 from COVID-19 conditions. We maintain our 2023 earnings forecast at Rmb57mn.
　　Under our neutral scenario, we assume that: 1) international passenger throughput recovers to 75%, 83%, and 88% of the 2019 level in 2024-2026; 2) per-passenger DFS spending rises 40% in 2024 compared with 2019, and grows 15% and 10% YoY in 2025-2026; and 3) take rate of the DFS business remains stable before 2025, and changes to 30% in 2026. We raise our 2024 earnings forecast 8% to Rmb1.8bn due to higher assumption for per-passenger DFS spending. We forecast 2025-2026 earnings at Rmb2.5bn and Rmb2.1bn. The stock is trading at 13x, 10x, and 11x 2024-2026e P/E. We assign 18x 2024e P/E (vs. previous target of 14x based on pre-pandemic average) as numerous headwinds weighed on the firm’s pre-pandemic valuations, and market sentiment is improving for the airport sector along with accelerating recovery in travel. We lift TP 36% to HK$8.3, implying 32% upside.
　　Under our pessimistic scenario, we forecast 2024-2026 earnings at Rmb700mn, Rmb1.0bn, and Rmb2.3bn, and assign 18x 2026e P/E.
　　Risks
　　Disappointing resumption of international flights; higher-than-expected traffic diversion from Daxing airport; intensifying competition among DFS channels; higher-than-expected growth in connected transaction cost; unexpected capex.