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Guangzhou Baiyun International Airport announced it signed a contract with China Duty Free Group (CDFG) to manage the outbound duty-free store (DFS) project in its Terminal 1 (T1). CDFG will operate T1's outbound DFS business. The DFS project spans an area of 1,747.18sqm, and the transfer period of the management rights is 20 months + X months; X months is the period of renewal and is based on the date when terminal 3 (T3) starts operation and T1 stops operation of international flights. The rent will be either a guaranteed minimum payment or a royalty- based payment, whichever is higher. The guaranteed rent is set at Rmb2,180/sqm per month, which can be slightly adjusted based on passenger volume growth; the sales commission rate is 23.15%.

Comments

We think the direction of rent adjustment is largely in line with our expectation. Before the announcement, details regarding the T1 outbound DFS contract were not disclosed. The basic commission rate is set at 42% for T1 and T2 inbound DFS and 35% for T2 outbound DFS. The guaranteed rent for these stores is about Rmb7,800/sqm per month in the first contract year. We think the low guaranteed rent and sales commission rate for T1 outbound DFS may be due to the Ministry of Finance's 2019 policy regarding DFS rent [link in Chinese], which stipulates that the rent for outbound DFS should not exceed 1.5 times the average rent of tax-inclusive retail stores in terminals for domestic flights in principle, and the sales commission rate should not exceed 1.2 times the average of tax-inclusive retail stores in terminals for domestic flights.

We expect the contract to have a small impact on the firm's earnings. T1 resumed operation of international flights in summer 2023 [link in Chinese]. According to CAPA, only about 29% of international flights (measured by number of seats) use Terminal 1. Meanwhile, we think that the firm's DFS operation and layout in Terminal 2 may have advantages over those in Terminal 1, and thus the sales contribution of outbound DFS in Terminal 1 may be small.

Financials and valuation

We maintain our 2024 and 2025 earnings forecasts at Rmb1.20bn and Rmb1.24bn. The stock is trading at 20.7x 2024e and 20.0x 2025e P/E. We maintain an OUTPERFORM rating and TP of Rmb12.90, implying 25x 2024e P/E and offering 22.5% upside. We suggest keeping an eye on the firm's DFS operation (mainly discounts on fragrances and cosmetics and introduction of tobacco and alcohol products) and the progress of its Phase III project.

Risks

Disappointing passenger demand and/or duty-free business development; higher-than-expected incremental cost from Phase III project.