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Shanghai International Airport recently announced the signing of the operating rights transfer contracts for duty-free store projects, under which Dufry Group won the bids for Pudong airport terminal 1 (T1) and satellite terminal 1 (S1), while CTG Duty Free won the bids for Pudong airport terminal 2 (T2), Pudong satellite terminal 2 (S2), and Hongqiao airport, with an operating period from early 2026 to end-2033. The firm also plans to establish two joint ventures (JV) with the winning operators separately to run the duty-free shopping (DFS) business, holding a 49% stake in each JV.

Comments

We believe the rental terms are largely in line with market expectations; we are upbeat on future sales at airports. We estimate the annual base rent under the current agreement at around Rmb760mn (slightly higher than the level in the previous round, mainly due to an 8% increase in duty-free store area), with commission rates for Pudong airport and Hongqiao airport at 8–24% and 8–22%, respectively. We are upbeat on future sales at airports, as:

1) The rental terms adopts a “guaranteed minimum payment + commission” structure, rather than “the higher of guaranteed minimum payment or sales-based commission.” While this reduces the sensitivity of rent to sales, we believe it may encourage DFS operators to boost sales to dilute fixed rental costs.

2) According to the rental terms, the firm will establish a sales incentive mechanism for DFS operators. If annual per-capita spending exceeds a certain target by a specified percentage or more, the excess will be returned to the operators as a tiered reward.

3) The introduction of dual DFS operators may help establish a competitive operating environment at the airport, in our view.

4) Leveraging the Ministry of Finance’s new duty-free policy introduced in October 2025 and Dufry’s operating experience, we expect new duty-free categories and domestic products to generate incremental sales at Pudong airport.

The equity cooperation with DFS operators slightly exceeds our expectations as the firm will hold a 49% stake in the JV, vs. only a 12.5% stake in Sunrise Duty Free (Shanghai) and Sunrise Duty Free (Beijing). We expect the firm’s investment income to increase.

Financials and valuation

We keep our 2025 earnings forecast unchanged at Rmb2.26bn. We raise our 2026 earnings forecast 3% to Rmb2.82bn as we slightly raise our investment income forecast due to higher-thanexpected JV ownership with DFS operators. We suggest paying attention to the firm's announcement on November 21 regarding the recovery of state-owned land use rights and the compensation agreement for facilities as the deal may generate one-off income from asset disposal.

The stock is trading at 34.1x 2025e and 27.3x 2026e P/E. We keep our TP unchanged at Rmb34.5, implying 38x 2025e and 30x 2026e P/E and offering 12% upside. Maintain OUTPERFORM.

Risks

Disappointing tourist traffic growth and/or DFS sales; sharperthan- expected asset impairment loss.