China Tourism Group Duty Free Corp

What does the company do?

China Tourism Group Duty Free Corp (CTG) is the world’s biggest travel retail operator, focused on the duty-free market. Why do we like the investment? We think CTG is a good proxy for the rising demand for duty-free cosmetics and skincare in mainland China. It has four major business lines: airport duty free, offshore duty free (Hainan), downtown duty free (pre-departure) and wholesale. The group has benefited from China’s decision to loosen restrictions on its lucrative duty-free industry, particularly in the popular tourist island of Hainan, amid a broader supportive policy trend of the government to bring overseas spending back to China. In addition, CTG’s growth via acquisitions is likely to result in greater scale and stronger bargaining power with the potential for a margin uplift versus new competition. In the Covid environment, CTG’s online business has evolved rapidly, accounting for close to half of overall sales. The pandemic has changed the way consumers shop, and the online business has complemented the traditional shopping model. CTG’s ongoing focus on developing its online and digitalisation businesses should also help the company to compete more effectively with other cross-border ecommerce operators. As China re-opens, and over the longer term, we see CTG as well positioned for growth, given its product portfolio, procurement capability and prime store locations. What is our key area of engagement? Sustainability and ESG awareness, including carbon emissions, data security, labour practices and supplychain management. What is the result? The group has been responsive to our engagement. It has indicated to us that its suppliers are also taking ESG issues seriously. It is working with brands to promote sustainability and awareness. CTG is also focusing on customer and stakeholder engagement and collecting feedback from stakeholders. It aims to raise its MSCI ESG rating from BB to A and ultimately AAA over the next two to three years. CTG has established an ESG management framework and leadership group with the board as the highest decision-making authority for its ESG efforts. Management has been proactively communicating with external ESG rating agencies and we are seeing this bear fruit. MSCI upgraded CTG from BB to BBB, citing its improved data privacy programme and corporate governance practices as driving the upgrade.