招银国际-中国中免-601888-Lockdown in Sanya likely represents yet another entry opportunity-220809

　　中国中免(601888)
　　Sanya’s Omicron subvariant BA.5.1.2 outbreak has led to ~700 positive cases asof yesterday, and has prompted the city to initiate lockdown again subsequent tothe one in April this year. In response to this, CTGDF has suspended its Sanyaoperation (Sanya DFS Mall phase 1 and 2) starting from 5 Aug (same day as thelockdown was initiated) until further notice. Judging from past experience, weestimate that Sanya’s social distancing policies will last for a month or so. Thiswould undoubtedly put a pause on the recovery that we have seen in June andJuly, when August is at the core of the summer travel season. The incident hasprompted us to lower our 2022E revenue by 14.9% considering also thepreliminary results announcement for 2Q. Meanwhile, we raise our 2022E GPMby 1.4pp to factor in an improved discount discipline of the Hainan’s duty freebusiness, and these in aggregate explain to an 8.1% cut in our 2022E net profitsand put us 6.6% below consensus. That said, similar to many other outbreaks inthe past, any disruptions from lockdowns to tourist traffic would only representtemporary drags to share price, in our view. If the situation gets under controlwithin August, we still see scope for travel demand to recover sequentially into4Q, particularly when the quarter is seasonally clustered with festivals andshopping campaigns. We remain BUY-rated.
　　An update on Hainan’s current outbreak. 827 confirmed positive caseswere reported during 1-7 Aug in the province, with 689 cases being reportedin Sanya. Local government has initiated a lockdown and implemented citywide nucleic acid tests. Meanwhile, inbound/ outbound flights, and publictransportations are suspended. Tourists are permitted to return home only ifthey are tested negative after completing the 7-day risk screening tests (i.e.,negative nucleic acid test results on day 1, 2, 3, 5, and 7).
　　Solid July momentum. The Department of Commerce of Hainan Provincereported over RMB5bn (+21% YoY) sales for offshore duty-free operatorswith RMB4bn duty-free sales (+9% YoY). The number extended from thestrength in June in which CTGDF reported a 13% YoY sales growth.
　　Valuation. Our new TP is based on an updated 45.0x (from 46.5x) rollforward mid-23E P/E (from end-22E) which still represents 2-year averagesince 2020. We raised our target multiple in our last upgrade report to reflectthe potential re-rating driven by the sequentially recovering, though bumpy,domestic tourist traffic over 2H22.