Leisure Goods and Services Global Travel Retail: Hainan, a game changer for the global travel retail market?

We expect new Hainan policy to offset tourist decline and unlock industry upside. China should gain market share in global travel retail, with Chinese duty-free operators, European luxury brands and prestige cosmetics as main beneficiaries

09 Jul 2020

China duty-free sales forecasts

Source: Ministry of Commerce. DFE, UBS-S estimates

The chart shows China duty-free sales forecasts to 2025

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:

  1. raises quota from Rmb30k/US$4.3k to Rmb100k/US$14.3k;
  2. adds seven new categories to eligible products list (including consumer electronics); and
  3. 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.

Authorized clients of UBS Investment Bank can log in to UBS Neo to read the full report.