What's new
Recently, Beijing Capital International Airport (BCIA) announced a series of contracts with ACT (a wholly owned subsidiary of BCIA’s parent company) for related-party transaction covering international retail, catering, and advertising businesses over 2024-2026.
Comments We think the latest contracts with ACT contain more favorable terms than previous ones, slightly beating market expectations. The market has been concerned about the negative impact of changes in contracts between BCIA and its parent company, especially for commercial franchising, as related-party transaction costs account for a high proportion of total costs and expenses (an average of 43% at BCIA over 2020-2022, vs. 17% at other listed airports). In overall terms, we believe the new commercial contracts for 2024-2026 have improved compared with the previous ones for 2021-2023.
In terms of international retail, the revenue-sharing ratio under the new contracts declines from 22% to 20%, and the sharing of incremental revenue is suspended. Meanwhile, the contract stipulates that the maximum amount of related-party transactions is Rmb240mn, Rmb370mn, and Rmb510mn over 2024-2026. That said, the effective revenue-sharing proportion will be lower than 20% if the firm’s duty-free rentals exceed Rmb1.20bn, Rmb1.85bn, and Rmb2.55bn over 2024-2026 (implying duty-free sales of Rmb2.7bn, Rmb4.1bn, and Rmb5.7bn under the current commission rate of duty- free agreements).
The sharing ratio also declines for non-duty-free businesses, which falls to 22% from 25% for advertising contracts and changes from 15.5% to 15% for restaurants. Incremental revenue-sharing mechanism and ratio remain the same.
Duty-free agreement yet to be finalized. The firm has yet to sign supplemental agreement of duty-free store (DFS) business with DFS operators, while Shanghai International Airport and Baiyun International Airport have already signed such agreements with China Duty Free. We suggest keeping an eye on future agreements of BCIA. We believe that after the resumption of international flights, international airports will attract a large number of high-spending tourists. We think DFS operators will continue to value this channel. However, due to changes in distribution channel structure, their pricing and distribution strategies for different channels may vary based on profit margins and customer base.
Financials and valuation
In 3Q23, passenger volume of the firm’s domestic and international routes recovered to 67% and 36% of the level in the same period of 2019. We cut our 2023 and 2024 earnings forecasts to -Rmb1.52bn and Rmb733mn (vs. previous forecasts of -Rmb1.34bn and Rmb889mn) due to disappointing tourist traffic recovery. The stock is trading at 18.3x 2024e P/E and 0.9x 2024e P/B (close to the trough level since 2010). We maintain OUTPERFORM and cut our TP 19% to HK$4.3, implying 24x 2024e P/E, offering 33% upside.
Risks
Slower-than-expected reopening of international flights; greater-than- expected impact from the transfer of international flights to Daxing International Airport; intensifying competition in DFS channels; higher- than-expected capex.