China duty-free sales forecasts
Hainan policy heralds a new era, yet it's just the start
Our recent investor discussions reveal key industry debates centre on post COVID-19 outlook and competition from new entrants. We find Hainan is an underappreciated growth story. Leveraging insights from 7 UBS teams and UBS Evidence Lab datasets, we forecast China duty-free sales to reach US$29bn by 2025E, implying a 25% 6-year CAGR, as we expect new Hainan policy effective 1 July 2020 to offset tourist decline and unlock industry upside. We expect China to gain market share in global travel retail, up from 10% in 2019 to over 20% in 2025E, with Chinese duty-free operators, European luxury brands and prestige cosmetics as main beneficiaries.
Hainan to bring new hope to post COVID-19 travel retail business
Travel retail is among the industries most impacted by the pandemic. With recent policy relaxation, we now forecast China duty-free sales to reach Rmb203bn/US$29bn in 2025E, nearly quadrupling the size of 2019. A key growth driver is the new Hainan policy, which:
- raises quota from Rmb30k/US$4.3k to Rmb100k/US$14.3k;
- adds seven new categories to eligible products list (including consumer electronics); and
- removes the single-item duty-free allowance cap, which is a clear positive for luxury goods.
We forecast Hainan duty-free sales to rise to Rmb90bn by 2025E, representing 45% of China duty-free sales (vs 25% in 2019), among which sales contribution from luxury goods may rise to 40% from 15% now. UBS luxury team expects the percentage of Chinese luxury consumption done domestically to surpass 50% by 2025E.