The market is always slow to catch on. While the media is still clamoring about the downgrade of consumption and people are still discussing how bad the economy is, the real-world consumption is actually quietly recovering.

According to the National Bureau of Statistics data, from January to November 2023, the total retail sales of consumer goods increased by 7.2% year-on-year, of which the total retail sales of consumer goods in November increased by 10.1% year-on-year, and the growth rate also increased by 2.5 percentage points month-on-month.

Not long ago, China Duty Free released a performance report, recording a net profit of 6.72 billion yuan in 2023, a year-on-year increase of 33.52%, of which the net profit in Q4 was 1.51 billion yuan, a year-on-year increase of 275.62%. Even compared with the peak performance in 2021, there was a growth of 29.9%, which far exceeded market expectations. Looking at the whole year of 2023, China Duty Free's profit has already surpassed 2020 and is only second to the best performance in history in 2021.

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In recent investor communications, China Duty Free stated that it is expected to perform better in 2024 than in 2023. At this stage, the State-owned Assets Supervision and Administration Commission's assessment of China Duty Free is more inclined towards high-quality growth, with key assessment indicators including total profit and return on net assets, etc. Therefore, the company will attach great importance to and focus on improving these key performance indicators.

In other words, for a period in the future, China Duty Free's profits are likely to outperform its revenue. This is indeed the case, as China Duty Free's gross profit margin in 2023 has increased by 3.42 percentage points compared to 2022. Looking forward to 2024, the company stated that the gross profit should further rise.

Focus on the long-term logic.

According to the customs clearance data of Hainan (all duty-free stores on the island), during the first five days of the Spring Festival holiday in 2024, the off-island duty-free sales amounted to 1.585 billion yuan, with 196,300 duty-free shopping visits, and a customer order of 8,074 yuan. If daily average data is used for comparison, then:

Daily sales: The average daily sales in 2024 is 317 million yuan, while the average daily sales in 2023 is 222 million yuan, a year-on-year increase of 42.79%.

Shopping visits: The average daily duty-free shopping visits in 2024 is 39,300 visits, while in 2023 it was 22,400 visits, a year-on-year increase of 75.45%.Average Customer Spend: In 2024, the average customer spend was 8,074 yuan, and in 2023 it was 9,936 yuan, marking a year-on-year decrease of 19%.

Due to the significant contribution of Hainan to the performance of China Duty Free, the overall performance situation of 2024 can also be roughly seen from the customs clearance data of Hainan during the Spring Festival. There will be an increase compared to 2023, but the exact amount of growth will depend on the subsequent recovery of domestic consumption.

However, speaking personally, I am not very interested in the short-term performance changes of companies. After all, the only measure of a company's value is the cash flow it can obtain in the future. Assuming that the company's performance is not good this year, but the performance and cash flow in the next year, the year after, and the following years are good, then the value of the company is fundamentally not affected.

I believe that readers are not reckless gamblers who chase the rise and fall of corporate performance (yes, in my view, following the rise and fall of corporate performance is no different from following the rise and fall of market value, both are gamblers).

China Duty Free is the world's largest integrated duty-free merchant, with very strong supply chain advantages, scale advantages, financial advantages, and brand advantages. To put it simply, what China Duty Free does is a retail business, but it is a bit more special than general retail, with restrictions on licensing. In other words, what China Duty Free does is a retail business with a monopolistic nature.

In terms of licensing, at least for now, China Duty Free is the only duty-free merchant in the country with a full range of duty-free licenses. Whether it is off-island, port, airport, or city duty-free business, China Duty Free can do it, while others cannot.

Of course, some students say, if the duty-free license is fully liberalized in the future, will the moat of China Duty Free no longer exist?

Not so, I said that China Duty Free is doing a retail business with a monopolistic nature.

Even if the license is liberalized, it cannot be separated from the essence of retail.In retail, the key is to excel in variety, speed, quality, and cost-effectiveness. As long as one of these dimensions is taken to the extreme, it is essentially invincible. For example, Taobao's strength lies in variety, JD.com in speed and quality, and Pinduoduo in cost-effectiveness.

Among the duty-free merchants, China Duty Free (CDF) currently has an absolute advantage in all four aspects. In terms of cost-effectiveness, as CDF puts it, "As the largest duty-free retailer in the country, we have the advantage of direct procurement, which makes our procurement prices more competitive than those of competitors without direct procurement channels. In the domestic market, our procurement costs may be 10% to 20% lower than those of our peers."

In terms of variety, CDF has more than 430 suppliers and over 1,200 direct brand procurement channels worldwide. According to the company's prospectus, as of the first half of 2023, the company has cooperated with over 1,300 brands, with a product mix of more than 310,000 SKUs, basically covering popular brands and products, including many international first-tier brands such as Dior, Estée Lauder, and Lancôme, as well as top luxury brands like Cartier, Hermès, and Prada. The number of cooperating brands far exceeds that of other domestic duty-free operators (Haitong Investment has 885) and is at a world-class level.

How important is this?

Chongqing previously opened a duty-free store in the city (the duty-free company is Zhongchu Fu, with the controlling shareholder being the State-owned Assets Supervision and Administration Commission of the State Council). The store has two floors and is estimated to be nearly 10,000 square meters, which is not small. Before the opening, the director had high expectations, but after visiting, he was extremely disappointed. Basically, there was nothing he wanted, and it was all small brands that he didn't recognize. The most important thing is that the prices were not cheap, making the director feel deceived.

Perhaps Guoyao also knew that it was not good at operating duty-free, at least far from CDF, so it simply sold 49% of the shares of Zhongchu Fu to CDF later.

Quality is self-evident, as they are all big brands and good products. The company even adjusts the SKUs according to consumer demand. In recent investor exchanges, the company said, "In recent years, we have been actively introducing more high-end products to optimize the overall product structure. Taking the Sanya duty-free store as an example, by 2021, the consumption proportion of high-end products (such as watches, jewelry, and other jewelry products) has exceeded 50%. Recently, these products have shown a strong growth momentum, with a year-on-year growth rate of 50% to 60%, even surpassing traditional hot-selling categories such as cosmetics."

As for speed, consumers can buy whenever they want and take it home at the fastest speed. On the one hand, CDF has occupied almost all the good positions that can be laid out. In addition to the strong positioning in Hainan Island, the positioning outside the island is also strong. Airports with large passenger flow and high-net-worth individuals, such as Shanghai, Beijing, Guangzhou, Hong Kong, and Macau, have all been occupied by CDF. As for city duty-free stores, it is mainly because the policy is not yet perfect, but the company has basically completed the positioning. In the previous teleconference, CDF mentioned, "As long as the policy comes out, we will act quickly and prepare. We already have stores in Harbin, Beijing, Shanghai, and other places, and have made a lot of layouts, signed intention agreements with Guangzhou, Chengdu, Wuhan, and other places, including site selection, etc. As long as the policy comes out, we can quickly implement the relevant agreements and then open stores."

According to the official statement of the semi-annual report, the company has established about 200 duty-free stores covering nine types of airports, on-board, borders, foreign ship supply, passenger stations, railway stations, diplomatic personnel, cruise ships, and city stores in more than 30 provinces, municipalities, autonomous regions, special administrative regions, and Cambodia, covering more than 100 cities, and has developed into the world's most comprehensive type of duty-free store and the duty-free operator with the most retail outlets in a single country.

On the other hand, in addition to the offline places that can best reach the target customers, CDF has also laid out online with tax and done very well.Here is the English translation of the provided text:

An additional explanation is needed here. The so-called "taxed" refers to the sale of duty-free goods in the domestic market after making up for the national tax rate (the online model adopted by China Duty Free). Although the price is higher than duty-free, due to China Duty Free's long-term scale advantage, supply chain advantage, and brand advantage in the duty-free industry, the overall price is still cheaper than domestic counters and even some overseas purchasing agents.

Therefore, in the past three years, the company's taxed business has developed rapidly. In the first year of the pandemic, it reached a scale of nearly 20 billion yuan, and in 2022, it reached nearly 28 billion yuan. The scale even exceeded the main duty-free business. By the end of 2022, the number of members of China Duty Free had reached 26 million.

In addition, according to the company, seven major customs supervision logistics centers have been established in Dalian, Qingdao, Shanghai, Shenzhen, Sanya, Hong Kong, and Beijing, covering the whole country. Advanced control systems are used to improve logistics efficiency and level, achieving efficient and fast distribution of goods nationwide.

Therefore, in terms of the four comprehensive dimensions of speed, quality, and cost-effectiveness, China Duty Free has done well, and it is still difficult for newcomers to surpass it.

Performance is improving

As mentioned earlier, China Duty Free's comprehensive competitiveness is basically the benchmark for domestic duty-free. Regardless of whether the license is relaxed, there are few competitors that can match it. The long-term logic is very clear. As long as you are optimistic about China's future economic growth and the growth of per capita GDP, there is no reason not to be optimistic about the development of China Duty Free.

However, in addition to the long-term logic, the short-term performance turning point of China Duty Free is also quite obvious.

In 2023, due to the slow recovery of consumption and the pressure of airport rent, China Duty Free's operations were under pressure, and the performance recovery was slow. However, the performance in Q4 was significantly better than market expectations, making a beautiful turnaround. On the one hand, the company signed a new rent agreement with the capital and Shanghai airports at the end of 2023, and the rigid rent pressure of airport duty-free is expected to ease. On the other hand, although the terminal consumption is slow, it is still recovering. In addition, China Duty Free also has some new businesses.

At the end of October 2023, the second phase of Sanya International Duty-Free City, with top luxury brands such as LV and Dior, was opened. At the end of December 2023, the first phase of the fragrance center of Sanya International Duty-Free City was officially opened. These are the new increments for the company's performance from 2024 onwards. Looking ahead, China Duty Free is also promoting the third phase of Haitang Bay Taikoo Li project.

According to the company, we have laid out for the future, launched major projects such as the Global Beauty Plaza, the core island renovation project of Yunjie Island, and the French-style garden of Sanya Phoenix Airport. These measures will help the recovery of the consumer market. The newly signed supplementary agreement aims to stimulate the purchasing power of airport consumers and enhance channel sales capabilities. It is expected that in 2024, the number of inbound and outbound passengers will further increase, providing strong support for the recovery of airport and border port business. At the same time, the use of the Hong Kong comprehensive transportation hub will ensure passenger flow and directly drive the growth of duty-free store business.Therefore, starting from 2024, the performance of China Duty Free (CDF) is expected to return to a normal growth range.

Declaration: This article only records the author's thoughts and does not constitute investment advice. Investment carries significant risks and should be approached with utmost caution. I hope everyone treats their investments as they would when renovating a house, not spending more time choosing a company than choosing furniture. If you can weigh the pros and cons for small amounts of money, why be so careless with larger sums?