Duty-free giant CTG plays hardball To Win Shop Contracts In Shanghai Airports

The company's spat with one of its own subsidiaries highlights the importance of airport outlets for duty free operators struggling with sluggish business in a slowing economy

Key Takeaways:

• CTG Duty Free has defeated one of its own subsidiaries in the bidding for licenses to operate shops at Shanghai's airports
• Both revenue and profits are falling for China's dominant duty-free store operator, as the sector struggles in a slumping economy despite strong government support

An unusual turf war involving China's leading duty-free store operator and one of its own subsidiaries is casting a spotlight on the sector's struggles in a slowing economy, even as Beijing takes repeated steps to support the industry.

The story from this low-profile sector burst into public view this month when staff from heavyweight CTG Duty Free Corp. Ltd. (1880.HK, 601888.SH) blocked two workers from Sunrise Duty Free Shanghai Co. from entering the headquarters of Shanghai Airport Group, operator of the two major airports in China's commercial capital. The Sunrise pair planned to submit bids to continue operating duty-free shops their company had managed for 26 years. CTG made the physical intervention after Sunrise moved ahead with its plan even after Sunrise's own board, which is majority controlled by CTG, previously voted against making the bid.

The Sunrise workers ultimately succeeded in submitting their bid, only to see it disqualified after CTG submitted an official withdrawal on Sunrise's behalf. In the end, CTG was one of two companies to win licenses from the Shanghai authority, evicting Sunrise from its longtime position at Pudong and Hongqiao airports.

Investors gave CTG a thumbs-up for its hardball tactics, sending the company's Hong Kong- and Shanghai-listed shares up 3% on news of the development, publicly announced by CTG on Dec. 17 when it formally won the contracts. But the stocks gave back all the gains in the next few days, as the market digested a development that, while important, was unlikely to reverse CTG's slumping sales and profits.

CTG Duty Free is almost exclusively focused on its home China market, with shops located outside the Chinese Mainland only in Hong Kong, Macao, Tokyo, Singapore and Sri Lanka. It has a virtual lock on the domestic market, with nearly 80% share, partly because of periodic restrictions against foreign participation, and partly because of its state backing.

Despite its huge homefield advantage, the company has stumbled since the pandemic as tourism in China – the biggest engine driving traffic to its stores – has remained sluggish since the pandemic ended in 2023. The bullying of its own subsidiary, in this case Sunrise, so it could get the Shanghai Airport contract all for itself seems symptomatic of the frustration CTG is feeling at more deep-seated issues in its sector.

Apart from sluggish consumer demand, changes in local tastes have driven down demand for pricey foreign products like luxury goods, liquor and cosmetics, as trendy domestic brands take a bigger slice of the market. At the same time, consumers are increasingly flocking to experience-oriented shopping in brick-and-mortar stores as well as domestic brands.

CTG has fared badly in the transition. In 2024, its revenue declined by 16% to 56.5 billion yuan ($8 billion), while its net profit sank by a larger 36% to 4.32 billion yuan, the largest drop in recent years. The revenue decline continued in the first three quarters of this year, falling 7.34% to 39.9 billion yuan in the nine-month period, with net profit down by 22% to 3 billion yuan.

That performance contrasted starkly with a global duty-free market that is still in a gradual post-pandemic rebound, rising 3% year-on-year to $74.1 billion last year. To try to placate worried investors, CTG in October promised its first-ever interim dividend and approved a share repurchase plan.

Downtown shopping

While CTG's winning of the contract to directly operate stores at Shanghai's two main airports could provide a small lift to its top-line revenue, the Sunrise scuffle raises questions about the future capacity of China's duty-free shopping market, which was worth 71.6 billion yuan last year. With airport and rail hubs now largely saturated, CTG and its peers have turned their attention to downtown stores in major cities, targeting a wider audience of travelers by offering services like online-to-offline shopping.

CTG's 200 retail shops make it the largest of China's duty-free chains. But the company is also likely to face growing competition with the country's recent decision to allow foreign operators into the sector, after shutting them out in 2019.

Sunrise reflects the bumpy road for foreign investment in the sector over the last three decades. That company, now 51% owned by CTG, was the first foreign-owned enterprise allowed into the highly regulated space in 1999, and has long been seen as an international standard setter in the Chinese industry. For years it was the only duty-free shop operator with stores at China's three major aviation hubs in Shanghai's Pudong and Hongqiao airports as well as Beijing's Capital Airport. The loss of its lock-hold in Shanghai looked likely, however, after the airport authority changed its bidding rules earlier this year to prevent the same entity from bidding repeatedly for its concessions.

In the end, CTG won the tender to operate two sites at Shanghai's Pudong and Hongqiao airports, while a third concession went to global travel retailer Avolta.

In some ways, CTG still looks untouchable. It controlled 78.7% of China's duty free and travel retail market in 2024, according to its own data, putting it well ahead of the next largest domestic rival, Hainan Development Holdings, with 7.1% of the market.

On Dec. 18, Hainan officially became a Free Trade Zone, with a two-tiered system allowing free trade between the island and areas outside China, while maintaining customs controls for imported goods traveling between the zone and the Chinese Mainland. Current duty-free license holders will retain their licenses with the new system's launch.

CTG's Hong Kong stock is up 27% this year, in line with similar gains for the benchmark Hang Seng Index, showing investors haven't given up on the company just yet. Analysts also look cautiously upbeat, forecasting the company's revenue declines could continue to moderate in the fourth quarter, as it returns to profit growth.

The launch of Hainan as a Free Trade Port may well breathe some new life into duty-free shopping on the island, boosting CTG's business in that key market. Citic Securities maintained its "buy" rating on the company after the December Sunrise incident, while CICC kept its "outperform" rating and raised its target price. Huaxi Securities believes that CTG's operations are bottoming out and beginning to recover. But Zhengxing Institutional Research sees less upside for the stock without better profits, arguing the company's current price-to-earnings (P/E) ratio of 39 is already higher than the industry average.

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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.