(Yicai Global) July 24 -- Stocks in China’s duty-free sector were all over the place today as new applicants for the much sought-after license surged while old license holders plunged. The stock was overpriced and the duty-free sector has been overhyped, analysts warned.

Wangfujing Group, a department store operator most known for the iconic Wangfujing Department Store in Beijing, was granted a duty-free business license in June as part of the country’s efforts to boost consumption in the wake of the Covid-19 pandemic.

Its share price [SHA:600859] skyrocketed almost six times to as high as CNY79.19 (USD11.29) in early July from CNY13.20 in early May. Today its stock crashed by the exchange-imposed limit of 10 percent to CNY58.95.

It was followed by other retailers with duty-free licenses which all plummeted by the daily limit, including China Tourism Duty Free Group [SHA:601888] which tanked to CNY204.54, Wuhan Department Store [SHE;000501] which dropped to CNY20.19 and Bailian Group [SHE:600827] which fell to CNY18.72.

The current stock has gone up more than the fundamentals can support, said a Shanghai public equity fund manager. There is high risk of short-term funds blindly chasing tax-free stocks without any evidence of strong performance, he added.

While there is room for growth in China's duty-free sector, there may have been too much hype and companies may not be able to meet expectations, an industry insider told Yicai Global.

Yet aspiring newcomers saw significant gains in their stock price today despite a sharp correction in the stock markets.

Retailer Zhongbai Holdings Group [SHE:000759] and BBK Electronics [SHE:002251] both shot up by 10 percent after announcing yesterday that they were applying for duty-free licenses. Zhongbai later closed at CNY7.95 (USD1.13) while BBK ended the day up 3.62 percent at CNY15.50. This was despite the Shenzhen Composite Index closing down 3.86 percent

Duty-Free Fever

Chinese travelers spent more than CNY180 billion (USD25.7 billion) on duty-free goods overseas last year, but only bought CNY50 billion worth at home, according to a research report by China International Capital.

The country's duty-free market is still dominated by airports and offshore shops, a tourism analyst told Yicai Global. The proportion of duty-free shops in urban areas is still low. This means that the domestic duty-free market has huge potential for growth, he added.

Cross-country tour groups are also back in action now that the Covid-19 pandemic is basically under control, driving expectations for the domestic duty-free market, the tourism analyst said.

Reason for Caution

Wangfujing’s entry into the duty-free club has stirred up this wave of ‘duty-free fever’ to some extent, he added. Since the beginning of July, seven companies have announced that they will apply for duty-free business licenses, five of which did so this week.

"Although tourism companies and retailers meet the basic requirements for doing duty-free business, they still lack some of the necessary skills, facilities and marketing savvy,” the insider said.

Even if they get a license, it does not mean that they will do well. In fact, there have been cases in Shanghai, Xiamen, Shantou and other cities where duty-free shops were not profitable and had to be shut down. Investors should take note, he added.

Editors: Tang Shihua, Kim Taylor