Speculation Spurs 400% Gains in Chinese Duty-Free Stocks

(Bloomberg) -- A frenzy for Chinese stocks linked to tax-free shopping has been sparked by international travel curbs and a drive to direct luxury spending back home.

With the nation’s army of traveling big spenders trapped by the pandemic, recent big winners have been companies operating or applying for duty-free licenses. Relaxed shopping quotas in Hainan, a tourist destination off China’s southern coast, have helped boost gains at a time when Beijing is aiming to introduce more competition in the state-dominated sector.

China Tourism Group Duty Free Corp.’s stock is up 125% this year, much of it since the firm renamed itself in June to reflect the importance of duty-free stores to its business. The company has an 85% share in China’s duty-free market, according to Orient Securities Co., and its stock was fondly nicknamed China Rabbit by investors for its tendency to keep jumping higher.

Elsewhere, Hainan Haiqi Transportation Group Co. has surged 368% this year. It said late last month that one of its top shareholders had submitted an application to the Hainan government for a duty-free license.

China’s policy loosening is part of its ambition to steer droves of luxury shoppers back home, guiding them to spend onshore instead of splurging abroad. That also dovetails with the national “dual circulation” mantra, promoting domestic consumption and reorienting toward self-reliance amid geopolitical risks.

Relaxed quotas in Hainan took effect July 1, including raising the limit to 100,000 yuan ($14,450) per person each year from 30,000 yuan and broadening the range of eligible goods. Duty-free spending in Hainan more than tripled last month from a year ago, with the average amount spent per customer doubling in the first week compared to the end of 2019, according to China Customs data. That contrasts with the fortunes of previously popular shopping destinations such as Hong Kong, which has seen its economy eroded by a plunge in tourist arrivals.

To be sure, buyers remorse remains a risk with some recent moves looking speculative. Long-unloved department store chain operator Wangfujing Group Co. gained 471% between May and its July high, before it said it was setting up a fully owned subsidiary to operate in the duty-free sector. It’s down about 21% from its July peak.

The trade further slumped on Wednesday, China Tourism Group Duty Free Corp. falling as much as 5.9% as of 10:30 a.m. in Shanghai, Wangfujing sliding 4.1% and Haiqi Transportation plunging as much as the limit.

“I’m not brave enough to participate in companies like Wangfujing and China Duty Free,” said Chen Yicong, managing director at Beijing Chengyang Asset Management Ltd. “There’s no telling how long the duty-free license dividend can last. China is continuously lowering taxes and there may come a time when shopping duty free is not that attractive.”

©2020 Bloomberg L.P.

With assistance from Bloomberg