Hainan closes its borders smoothly. Can China Duty Free become the "pig on the wind" trend?

Ask AI · How exactly do the Hainan free port policies drive China Duty Free Group’s revenue back into positive?

On the evening of March 30, $China Duty Free Group (601888.SH) released its 2025 full-year report. Since it had already published an earnings pre-announcement, there will be no surprise relative to expectations (Bloomberg’s expectation was that updates would be delayed). Therefore, Dolphin Jun interprets it from two angles: ① the latest changes reflected in quarterly performance; ② detailed breakdowns disclosed only in the half-year/annual report. The details are as follows:

**1、**On the revenue side, China Duty Free Group’s total revenue slightly exceeded 13.8 billion yuan, up 3%% year over year—marking the first positive growth since 2024. This shows that with customs clearance and policy stimulus, performance is indeed trending better.

From the island-hopping duty-free industry data, in Q4, Hainan’s overall duty-free sales increased 19% year over year, which is also the first return to positive growth since 2024. However, looking at the price-and-volume drivers, the main repair came from higher per-capita spending after the expansion of duty-free covered categories, while the recovery in passenger traffic is still not obvious.

That said, since the free port began in mid-to-late December, its impact on Q4 is limited and not unexpected. We need to keep an eye on whether passenger traffic will also recover afterward.

**2、**By revenue type, revenue from taxable goods is still down about 22% year over year, with no major improvement versus the first half. The drag from “the cleanup/withdrawal” of transitional taxable business during the post-pandemic period has not fully ended yet.

Meanwhile, the sales growth of taxable goods in the same period has already turned positive to around 11%, indicating that duty-free sales indeed are recovering.

Also worth noting, for 2025 overall, revenue from the Hainan region decreased only slightly by 1% year over year. But in the Shanghai region (mainly airport channels), revenue fell sharply by 25% year over year. This suggests that with policy support, Hainan is recovering, but other channels remain relatively weak.

**3、**On the gross margin side, in Q4 China Duty Free Group achieved gross profit of 4.6 billion yuan, and the gross margin continued to rise from 31.8% in the prior quarter to 33.4%. Compared with the same period last year (28.5%), the improvement is even more pronounced.

Looking at changes in gross margin across different revenue types, we can see that within 2H25, the reasons for the rise in gross margin are: a. structurally, the share of taxable sales with lower gross margins is declining; b. gross margin on taxable sales is clearly improving; c. however, the gross margin on duty-free sales is actually broadly flat.

4、Sales and marketing expense in the current quarter was 2.23 billion yuan, down slightly 1.8% year over year. Although the change is not large, and with the scale effect as revenue grows, the expense ratio still narrowed by about 0.8 percentage points.

Therefore, with the resonance of improved gross margin and a narrowing marketing expense ratio, the gross profit minus sales/marketing spread (gross margin less marketing expenses) increased by about 3.6 percentage points year over year, setting up the result of a major improvement in this quarter’s profit.

5、Other expenses outside marketing are dragging on profit release. Tax expenses—possibly because the share of duty-free sales is rising—increased by 0.2 percentage points as a share of revenue. Net profit from financial contribution (interest income - interest expense) also decreased slightly versus the same period last year.

As for administrative expenses, they rose sharply from 590 million yuan last year to 910 million yuan, but this is because the quarter recognized an impairment loss of goodwill of a subsidiary—according to estimates, the impact is around 300 million yuan. This shows that after excluding that impairment impact, administrative expenses and last year’s same period should not have changed much.

6、Although other expenses are somewhat dragging, due to a larger improvement in the gross profit minus sales/marketing spread, the profit improvement in this quarter is still quite evident. Operating profit margin was 5.9%, up 0.5 percentage points year over year (excluding the one-time impact from administrative expenses, it reaches 8%). Ultimately, operating profit amounted to 820 million yuan, up 14% year over year.

The main profit metrics that investors focus on: after deducting non-recurring items, attributable net profit was 510 million yuan, up 95% year over year (also because last year’s base was extremely low). With operating leverage being released again, the extent of profit improvement remains quite significant.

7、From the dividend perspective, the company announced an annual dividend of 0.45 yuan per share, totaling about 935 million yuan. Together with the previously announced interim dividend of about 490 million yuan from the third-quarter report, the company’s cumulative dividends in fiscal year 2025 are about 1.2% of its current market value. Although the dividend yield is not high (because the valuation multiple is too high), it is already equivalent to 40% of full-year net profit—not very high, but also not stingy.

Dolphin Research Viewpoint:

In simple terms, this quarter largely continues the trend of bottoming and recovery in performance that began in the third quarter, and the strength of the recovery has further increased. On the one hand, as revenue growth has basically stopped falling, the earlier de-leveraging and scale inefficiency have seen a marginal turnaround. On the other hand, the profits in the same period in 2024 and in the past few quarters of 2025 are at historical lows; with such a low base, this quarter’s profit shows very significant improvement both quarter-over-quarter and year-over-year.

The main cause of this positive trend is the impact of the “Hainan free port” we mentioned last quarter. Its main impact includes two aspects:

1）On one hand, in mid-October before customs clearance, the government upgraded the policy for duty-free shopping for outlying island purchases. This included a. expanding the scope of duty-free goods, adding pet supplies, portable musical instruments, micro drones, small home appliances, and other items—raising the number of categories from 45 to 47; b. expanding the eligible population for outlying island duty-free purchases, allowing departing tourists to enjoy the outlying island duty-free policy. Island residents with records of outlying island trips within a natural year are allowed to purchase outlying island duty-free goods without limits on the number of times. c. expanding the sources of duty-free goods: allowing some products from domestic goods to enter outlying island duty-free shops for sales, with (exemptions/rebates of) VAT and consumption tax, including clothing, shoes and hats, ceramic products, scarves, coffee, tea, and so on. (Previously, it was only limited to overseas imported goods.)

2）Since Hainan customs clearance began on December 18, 2025, the short- and medium-term impact that takes effect immediately is that overseas personnel can enter and exit Hainan much more conveniently. Logically, this can bring more passenger traffic and potential duty-free shoppers. From a long-term perspective, Hainan may leverage the advantage of the free port’s positioning to build stronger industries in transshipment trade, manufacturing, and supporting services, attracting high-quality companies and inbound populations, thereby boosting the overall consumption capacity of Hainan.

Judging from recent outlying island duty-free sales data, the actual driver of the recovery in company sales during Q4 is more due to the policy easing in October, rather than the impact of Hainan’s free port starting in December. Within Q4, the number of outlying island shopping trips remains in negative growth (-8%). Yet per-capita spending/average ticket value grew nearly 30% year over year. This indicates that the number of passengers coming to Hainan had not yet increased meaningfully in Q4; the main reason is the positive effect from the expansion of the range of goods covered by outlying island duty-free.

However, customs clearance began in mid-December after all, so limited impact on Q4 is not unexpected. Looking at January–February 2026 data, growth in outlying island duty-free shopping trips has turned positive year over year to 21% and 13%, respectively, indicating that the benefits for passenger traffic from policy easing & customs clearance are also starting to show. The factor driving sales growth has shifted from relying almost entirely on price to a healthier alignment of both price and volume.

That said, the company does not only have good news. Recently, Shanghai Airport announced the bid-winning document for airport duty-free operations, in which China Duty Free Group only obtained the duty-free operation rights for Pudong T2 and Hongqiao T1&T2, losing the Pudong T1 segment. At the same time, duty-free operations for Pudong T2 and Hongqiao T1&T2 are handled by a joint venture between China Duty Free Group and Shanghai Airport (China Duty Free Group 51%, Shanghai Airport 49%). Compared with the scenario in which China Duty Free Group could exclusively hold 100% rights, this implies China Duty Free Group will take a smaller share of the profits—effectively an increase in airport commission.

This matches the trend shown in this earnings report: Shanghai channel revenue is still experiencing a significant decline even as duty-free outlying island sales recover, meaning other channels are under pressure as well.

In valuation terms, after the earlier surge following announcements of customs clearance and supporting policies, and the subsequent drop after Shanghai Airport lost part of its bids, China Duty Free Group’s current share price has essentially returned to the level before the customs clearance news was released.

Looking ahead, Wind’s consensus estimates show that sellers expect China Duty Free Group’s attributable profit for 2026 to be around 5 billion yuan. But buyers’ expectations may be higher, around 5.5–6 billion yuan—significantly higher than this year’s 3.5 billion. Implied revenue growth is just over 10%, and the profit margin repairs to around 9%, roughly comparable to 2022 and slightly lower than about 10% in 2023.

So, China Duty Free Group’s current market value (calculated using a lower valuation basis for Hong Kong listed shares) corresponds to about 20–21x PE for 2026 profit. While the absolute valuation is not low, for China Duty Free Group it is already a relatively conservative valuation. Therefore, the valuation can be said to be reasonable, and the upside/downside mainly depends on whether actual profits are better or worse than expectations.

But logically, the company’s historical performance has not been great, and Dolphin Jun does not have particularly high confidence in the company. It is still suggested to view China Duty Free Group as a beta stock that can benefit from exposure to the Hainan free port dividend, rather than expecting excessive alpha outperformance from the company level.

Detailed comments are as follows：

I. With customs clearance tailwinds, revenue finally stops falling and turns upward

In Q4 of 2025, China Duty Free Group’s total revenue was slightly above 13.8 billion yuan, up 3%% year over year—marking the first time since 2024 that revenue growth turned positive. Driven by the stimulus from the Hainan free port and the outlying island duty-free policy, the company’s performance does show a marginally improving trend.

From industry data on Hainan outlying island duty-free sales, in Q4 the overall sales value of Hainan’s outlying island duty-free increased 19% year over year, and it returned to positive growth for the first time since 2024; there are indeed clear signs of recovery.

But from the price-and-volume drivers, it can be seen that the recovery in Q4 mainly relied on higher per-capita spending after duty-free coverage of product categories expanded (both per-capita spending amount and items-per-order price increased by about 30% year over year); the recovery strength in passenger traffic is still not evident (even though the decline in shopping trips narrowed, it remained negative at 8% year over year).**

However, since customs clearance was implemented in mid-to-late December, limited impact on Q4 is not unexpected. It is worth watching whether the recovery magnitude in this year’s first quarter can rise further.

II. Duty-free is stronger than taxable; outlying island duty-free is stronger than airport duty-free

Based on the breakdown by type disclosed in the semiannual reporting, revenue from taxable goods is still down about 22% year over year, and the decline is basically the same as the first-half drop. The company’s proactive “cleanup/withdrawal” of transitional taxable business during the pandemic period means the drag period on the company’s overall sales has still not fully ended.

At the same time, it can be seen that the sales growth rate of taxable goods in 2025’s lower half has already turned positive to around 11%, which is roughly in line with the growth of Hainan outlying island duty-free sales of about 9% in the same period. This shows that the core main business—duty-free sales—is what is recovering.

Also worth noting, 2025 overall revenue in the Hainan region (outlying island duty-free + taxable goods, accounting for about 54% of the total) only decreased slightly by 1% year over year, while in the Shanghai region (mainly airport channels, accounting for 23% of total revenue), revenue fell sharply by 25% year over year.

This indicates that under policy support, sales in Hainan are indeed showing a recovery trend, but other channels remain relatively weak.

III. Gross margin is recovering, but it seems to be more due to taxable business contribution

In Q4, China Duty Free Group achieved gross profit of 4.6 billion yuan, and the gross margin continued to rise from 31.8% in the previous quarter to 33.4%. Compared with the same period last year (28.5%), the improvement is even more significant.

Looking at changes in gross margin across different revenue types, the main reasons for the gross margin improvement are: a. structurally, the share of taxable sales with lower gross margins declines; b. gross margin on taxable sales improves clearly; c. however, the gross margin on duty-free sales has not actually improved in 2H25 compared with 1H25.

From this, it seems that customs clearance has not yet produced a clearly noticeable pull effect on duty-free sales gross margin. Still, because the base last year was low, the duty-free gross margin has improved by 1.4 percentage points on a year-over-year basis.

IV. Marketing spending doesn’t drop much, but the scale effect matters a lot

Sales expenses this quarter were 2.23 billion yuan, down slightly 1.8% year over year. Although China Duty Free Group’s marketing spending has always been relatively rigid, with only small fluctuations up and down, with the scale effect as revenue grows, the expense ratio still narrowed by about 0.8 percentage points year over year.

Since Q4 is the second busiest season after the Spring Festival period in Q1, the marketing expense ratio therefore passively shrank to 16.9%, a decrease of 1.5 percentage points from the prior quarter.

Therefore, with the resonance of improved gross margin & a narrowing marketing expense ratio, the gross profit minus sales/marketing spread was 2.4 billion yuan this quarter, up sharply by about 50% both quarter-over-quarter and year-over-year. The gross profit minus sales/marketing spread ratio improved by about 3.6 percentage points year over year, setting up the major improvement in this quarter’s profit.**

V. Operating leverage released, profits improved significantly

However, other expenses in this quarter were dragging on profit release. You can see that, in line with the rise in duty-free sales value, the share of tax expense as a proportion of revenue actually increased by 0.2 percentage points (corresponding to the higher share of duty-free sales). Net profit from financial contribution (interest income - interest expense) also decreased slightly versus the same period last year.

What is more unusual is that administrative expenses increased sharply from 590 million yuan last year to 910 million yuan. Combined with the company’s disclosure, it should be due to the impact of goodwill impairment losses recognized this quarter for a subsidiary (according to estimates, the impact is around 300 million yuan). This suggests that after excluding that impairment impact, administrative expenses and last year’s same period would not have changed much.

Overall, although other expenses are somewhat dragging, because the improvement in the gross profit minus sales/marketing spread is larger, this quarter China Duty Free Group’s operating profit margin was 5.9%, up 0.5 percentage points year over year (excluding the one-time impact from administrative expenses, the operating profit margin reaches 8%). Ultimately, operating profit was 820 million yuan, up 14% year over year.

The profit indicators that the market mainly focuses on: after deducting non-recurring items, attributable net profit was 510 million yuan, up 95% year over year on a big jump. Given the low base last year and the operating leverage released again in this quarter, the cooperation between the two led to a very significant extent of profit improvement.

For Dolphin Research’s previous work on 【China Duty Free Group】, please refer to:

Earnings report reviews:

Earnings report review for October 30, 2024: 《“Falling more makes it more expensive,” does China Duty Free Group still have a floor?》

Earnings report review for August 30, 2024: 《Fell again and again, China Duty Free Group has become a “bottomless pit”》

Earnings report review for April 23, 2024: 《China Duty Free Group: the world is hard, and the “double kill” is brutal》

Earnings report review for March 27, 2024: 《China Duty Free Group: duty-free is flat-lining with no improvement—when will it turn around?》

In-depth:

April 27, 2022: 《With the shadow of the pandemic and intensified competition, the time for China Duty Free Group’s turnaround has not arrived yet》

Risk disclosure and statement of this article: Dolphin Securities (Dolphin Research) investment research disclaimer and general disclosures