Hainan Duty-Free Sales Decline YoY Post-May Day; Morgan Stanley Maintains Equal-Weight Rating on CTG Duty Free

Overview

This report is an event comment by Morgan Stanley on China Tourism Group Duty Free Corporation Limited (1880.HK/601888.SS). The report notes that Hainan duty-free sales declined 3% YoY during May 6-31, 2026, performing below the firm's expectations. This deceleration was primarily driven by a drop in foot traffic, despite slight YoY growth in average spending per customer and ASP. Given that the demand slowdown trend may continue to suppress stock price momentum in the short term, the firm maintains an Equal-weight rating on CTG Duty Free, with an H-share target price of HK$77.

Core views

Sales growth slowed significantly, mainly dragged down by foot traffic. Data shows that Hainan duty-free sales totaled RMB 1.41 billion from May 6-31, down 3% YoY; whereas sales during the May Day holiday (May 1-5) rose 10% YoY. For the full month, May duty-free sales were flat YoY (RMB 1.964 billion vs. RMB 1.957 billion), showing a clear deceleration trend compared to the high growth in March (+25%) and April (+10%). Volume-price breakdown indicates 'volume down, price stable.' Weakness in sales stemmed primarily from reduced foot traffic: shoppers fell 5% YoY to 240,000 from May 6-31, and items purchased per shopper dropped 3% YoY to 5.2. However, consumption quality did not deteriorate markedly; average spending per shopper rose 2% YoY to RMB 5,865, and ASP increased 5% YoY to RMB 1,133. This suggests that although store visits decreased, the purchasing power and brand upgrade trends among remaining customers persist. Cosmetics imports continued to face pressure. Hainan cosmetics product imports (including duty-free and general retail) fell 5% YoY in May, slightly worse than April's -4%. This reflects ongoing challenges in demand recovery for core categories, likely related to the macroeconomic environment and pressure on consumers' disposable income. Valuation and rating rationale. For H-shares (1880.HK), the firm applies a 15% discount to reflect liquidity differences relative to A-shares, corresponding to a 2026E P/E of 27x (A-shares at 32x, +1 standard deviation above the mean since 2017). The firm believes near-term demand deceleration will weigh on share price performance, hence maintaining an Equal-weight rating. In the long run, healthy growth in the Hainan travel retail market remains the key driver for revenue and margin expansion, though risks from economic slowdown and intensified competition warrant caution.

Analysis framework

The firm employed a typical 'volume-price decomposition' framework to analyze retail data. By breaking total sales into 'Shoppers,' 'Items per shopper,' and 'ASP,' the firm precisely identified insufficient foot traffic as the core driver of the sales decline, rather than consumption downgrade. Additionally, the report used relative valuation, referencing A-share valuations and applying a historical average discount rate for H-shares to derive the target price. This analytical approach helps investors distinguish between short-term fluctuations (e.g., foot traffic changes due to holiday timing shifts) and long-term structural trends (e.g., consumption upgrades or competitive landscape changes).

Methodology notes

• Industry Analysis FrameworkVolume-price decomposition

  Decomposing sales into volume (shoppers x items per shopper) and price (ASP) dimensions for analysis

  By breaking down sales composition, one can determine whether performance changes are driven by 'selling more' or 'selling at higher prices.' This research note found that the sales decline was mainly caused by reduced foot traffic while unit prices still rose, indicating that weak demand stems primarily from insufficient popularity rather than consumers' unwillingness to spend on premium goods.

• Valuation MethodPE/PEG valuation

  Valuation based on forecast P/E ratio and target PEG ratio

  The firm used CTG Duty Free's 2026E EPS multiplied by the target P/E ratio (32x for A-shares, 27x for H-shares) to calculate the target price. The H-share valuation incorporates a historical discount factor relative to A-shares, a common cross-market valuation adjustment method.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Tourism Group Duty Free (1880.HK)

  Direct beneficiary/adversely affected target; Hainan duty-free sales data directly reflects its core business performance

  Strengths

  Positive YoY growth in ASP and average spending per customer demonstrates that brand premium and consumption upgrade logic remain intact; healthy long-term growth expectations for the Hainan travel retail market

  Weaknesses

  YoY decline in foot traffic and significant near-term sales growth deceleration; asset-heavy model results in relatively lower ROE

  Comparison

  H-share valuation trades at a 15% discount to A-shares, reflecting liquidity differences

  Risks

  Macroeconomic slowdown leading to disposable income pressure; price competition across retail channels; intensified competition from further duty-free market policy liberalization

• China Tourism Group Duty Free (601888.SS)

  A-share listed entity of the same group; serves as valuation anchor

  Strengths

  A-shares enjoy a higher valuation premium (32x P/E), reflecting domestic investors' recognition of its leading position

  Weaknesses

  Growth drivers are concentrated mainly on the Hainan business turnaround, with limited diversification

  Comparison

  A-share target P/E of 32x (+1 standard deviation above mean since 2017) implies 1x PEG

  Risks

  Same as H-shares, including economic slowdown, price competition, and policy risks

Key data

• Duty-Free Sales YoY (May 6-31)-3%Below expectations, mainly dragged down by foot traffic
• Shoppers YoY (May 6-31)-5%Reduced foot traffic is the main cause of sales decline
• Avg Spending Per Shopper YoY (May 6-31)+2%Average ticket size maintained growth, showing consumption resilience
• ASP YoY (May 6-31)+5%Higher unit prices reflect product mix upgrade
• Hainan Cosmetics Imports YoY (May)-5%Demand for core categories remains under pressure
• H-Share Target PriceHK$77Corresponds to approx. 27x 2026E P/E

Impact & implications

The research note argues that the slowdown in Hainan duty-free sales growth, particularly the decline in foot traffic, will pressure CTG Duty Free's stock price momentum in the short term. Although increases in average spending per customer and ASP indicate some signs of consumption upgrade, they are insufficient to fully offset the negative impact of reduced foot traffic. Investors should monitor post-holiday foot traffic recovery (e.g., impacts from Dragon Boat Festival timing shifts) and improvements in the macro consumption environment. The firm warns that further government liberalization of the duty-free market or intensified competition could impact the company's market share.

Risks

• Overall economic slowdown and pressure on residents' disposable income
• Intensified price competition across various retail channels
• Potential intensification of competition if the government further opens up the Hainan and mainland duty-free markets

What to watch

• Subsequent implementation of Hainan Free Trade Port and downtown duty-free policies
• Recovery in consumer spending, especially consumption upgrade trends in cosmetics and non-cosmetics luxury goods
• MoM changes in Hainan duty-free foot traffic and sales data in subsequent months