CITS:Robust growth from duty free sales in all channels in 1H17-BUY

More details disclosed in the interim result following the preliminary result

    CITS announced its interim report this evening. Although CITS already announcedits preliminary earnings growth of 16.8% yoy to RMB1.29bn and top line growthof 22.5% yoy to RMB12.6bn a couple of weeks before, we managed to see themore detailed drivers behind the earnings growth through its interim result report.We believe a 44% top-line growth from its duty free business (retail segment) isthe main driver. In addition, the company also consolidated duty free from Sunrisein 1H17with RMB 1.36billion revenue contribution.

    Valuation and risks

    We believe CITS’ valuation is very attractive at 22x/19x on our 2017/18earningsforecast, as duty-free is a policy-protected and high-barrier-to-entry business inChina. CITS’ valuation is lower than average retail/travel peers in A shares. Wederive our RMB 37TP from a DCF-based valuation (8.1% WACC, 9% cost ofequity, beta of 0.9and 3.0% TGR, unchanged). Key downside risks include: 1)unfavorable government policy, 2) e-commerce competition, 3) delay in liftingshopping quota, and 4) competition from OTAs.