中国国旅(601888)

Don't underestimate Haitang Bay's duty-free sales growth in 2H17We recently talked to travel agencies and hotel managers in Haitang Bay in Sanya.According to their feedback, traffic growth in Haitang Bay was robust from Julyto September. We estimate duty-free sales in Haitang Bay could reach as highas 50-60% from July to September. While the market seems to be expecting1) potential bidding for duty-free businesses at Shanghai Pudong Airport and2) approval for a downtown duty-free business in Beijing, we believe CITS'sHaitang Bay duty-free sales may surprise to the upside in 2H17 as domestic travelmomentum to Sanya is strong. In view of the national holiday (golden week),we expect October duty-free sales to maintain strong momentum. We slightlyrevise up our revenue/earnings forecasts by 4%/1% for 2017 and 6%/7% for 2018to reflect the better-than-expected Haitang Bay duty-free sales. Consequently, welift our target price to RMB40, from RMB37 previously.

The new Atlantis Sanya Resort should attract more overnight consumers toshop in the Haitang Bay duty-free mall

In the longer term, we believe the strong momentum of Haitang Bay's duty-freesales growth will prevail. The world's third Atlantis Hotel Resort is scheduled toopen at the beginning of 2018. Atlantis Resort is not only a luxury hotel but alsoa water park, located only 2km from the Haitang Bay duty-free shopping mall.We expect Atlantis to attract an incremental 2-3 million tourists to the HaitangBay area; we believe Atlantis' entertainment facilities should encourage tourists tostay overnight and these tourists will likely be the key traffic driver for the HaitangBay duty-free shopping mall.

National holiday kicks off with a strong start; Haitang Bay shopping mall sees

19.2% visitor growth on first dayAccording to Sanya tourism statistics, the total number of visitors to the Haitang

Bay duty-free shopping mall on the first day of the national holiday was 11,951,representing growth of 19.2% yoy vs. only 10k visitors last year (-12% yoy). Hoteloccupancy in the Haitang Bay area also reflects this recovery. The occupancy rateof Haitang Bay hotels is 75%, with an ADR of RMB1,010, representing a rise of15.4%. These data points underpin our view that this should be a year of robustdomestic travel growth, and Sanya is the best proxy for such a recovery.Catalyst ahead? CITS keeps winning new key airports. What's left?

According to Duty Free Expert news, CITS is the confirmed winner of theoutbound duty free concession (concessionaire rate of 35%) at Guangzhou BaiyunIntl Airport. To recap, CITS won the bidding for inbound duty free with a 42%concessionaire rate at the beginning of May 2017. The recent departure dutyfree concession win will make CITS the exclusive duty-free player at GuangzhouIntl Airport. Since the merger of CITS with ChinaTravel HK Group, we have seenthe new management becoming more aggressive in gaining duty-free marketshare at major airports this year. So far, CITS has won the bidding at HK IntlAirport, Beijing Capital Intl Airport and Guangzhou Baiyun Intl Airport. The dutyfree period of Sunrise Duty Free Group (Shanghai), which operates at ShanghaiPudong International Airport, will expire at the end of 2018E. This leaves onlyShanghai as the last piece of the pie for CITS to take, which could be a potentialpositive catalyst in the near term, in our view.

Valuation and risksWe believe CITS’s valuation is very attractive at 22x our 2018 earnings forecast,

as the duty-free business is protected and enjoys barriers to entry in China. CITS’svaluation is lower than the average of A-share retail/travel peers. Our TP of RMB40implies a forward PER of 25x on our 2018 earnings forecasts. We derive ourTP based on DCF (8.1% WACC, 9% cost of equity, beta of 0.9 and 3.0% TGR,unchanged). Key downside risks include 1) unfavorable government policy, 2) ecommerce competition, 3) delays in lifting shopping quota, and 4) competitionfrom OTAs.