China Duty-Free Sector's Strategic Shifts and Market Resilience Amid Revenue Slumps

The China duty-free sector, once a beacon of rapid growth, now faces a crossroads. Revenue declines, intensified competition, and shifting consumer behavior have tested the resilience of even the most entrenched players. Yet, within this turbulence lies a story of adaptation and strategic reinvention, particularly for China Tourism Group Duty Free (CTG). As Hainan's policy-driven recovery gains momentum and CTG refines its operational efficiency, the company's long-term investment potential warrants careful scrutiny.

Revenue Declines and Market Pressures

CTG's financial performance in the first half of 2025 reflects the sector's broader struggles. Operating income fell by 9.96% year-on-year to CNY 28.15 billion, while net profit plummeted by 20.81% to CNY 2.6 billion. These declines stem from a perfect storm: a 29.3% drop in Hainan's duty-free sales in 2024, driven by a 67.8% surge in outbound travel, and weaker demand for high-margin categories like cosmetics and luxury goods. Hainan, once the engine of CTG's growth, now contributes just 51.4% of total revenue—a stark contrast to its 70% share in 2023.

The sector's challenges are compounded by global players like DFS Group and Sunrise Duty-Free, which are leveraging digital partnerships and expanding physical footprints to erode CTG's dominance. Yet, CTG's offshore duty-free market share in Hainan remains robust at over 85%, a testament to its first-mover advantage and deep supplier relationships.

Strategic Diversification and the “Duty-Free+” Model

CTG's response to these pressures is a strategic pivot toward a “duty-free+” model, blending retail with tourism, culture, and wellness. Flagship stores in Hainan now feature interactive exhibits such as the Malt & More Whisky museum and the cdf Watch Carnival, which showcase over 50 luxury brands. These experiential formats aim to drive foot traffic and deepen engagement with high-margin products.

The company is also expanding beyond Hainan, reopening its Dalian downtown duty-free shop and securing new projects in Shenzhen, Guangzhou, and Xi'an. This diversification mitigates overreliance on a single market and taps into mainland China's growing appetite for premium retail. Digitally, CTG has enhanced its platforms to engage its 38 million-member base, focusing on inventory turnover and operational efficiency.

Hainan's Policy-Driven Recovery

The most transformative force for CTG is Hainan's island-wide bonded zone, implemented on December 18, 2025. This policy allows 6,600 goods to enter the island tariff-free—nearly tripling the previous 1,900 items—covering 74% of taxable imports. For CTG, this means duty-free commodities like cosmetics and liquor retain their cost advantages, preserving its competitive edge.

Moreover, goods with at least 30% value-added processing in Hainan can be sold tariff-free in mainland China, creating a new revenue stream. This aligns with China's dual-circulation strategy, prioritizing domestic consumption while maintaining global retail presence. The policy has already spurred investor optimism, with CTG's shares surging 10% on the Shanghai Stock Exchange and 15.21% on the Hong Kong Stock Exchange.

Operational Efficiency Gains

CTG's resilience is underpinned by operational improvements. Inventory turnover increased by 10% in 2025, reflecting better supply chain management and reduced holding costs. The company is also adopting AI-driven automation and IoT-enabled logistics to optimize delivery routes and inventory tracking. Labor cost optimization through robotics and digital platforms further enhances margins.

Clean energy innovations, such as electric vehicle fleets for deliveries, align with China's sustainability goals and reduce long-term operational costs. Blockchain and AI are being integrated to ensure secure transactions and real-time data analytics, bolstering transparency and efficiency.

Investment Considerations

While CTG's short-term financials remain under pressure, its long-term prospects are bolstered by strategic alignment with Hainan's policy tailwinds and operational efficiency gains. The company's “duty-free+” model and global retail expansion position it to capitalize on both domestic and international demand.

However, risks persist. Intensified competition and potential market saturation could dampen growth. Investors must monitor key metrics: inventory turnover, membership growth, and the success of new retail formats in Hainan and beyond. Analysts remain cautiously optimistic, with 29 “buy” recommendations and 8 “hold” ratings, though the 1 “sell” recommendation underscores lingering uncertainties.

Conclusion

For long-term investors, CTG represents a compelling case study in strategic reinvention. Its alignment with Hainan's economic transformation, coupled with digital and experiential retail innovations, offers a path to sustainable growth. While near-term volatility is inevitable, the company's ability to navigate these challenges and leverage policy-driven tailwinds could unlock significant value. Those with a patient horizon may find CTG's evolving story worth the wait.