Sometimes corporate drama gets weird. But when China's dominant duty-free retailer literally physically blocks employees from one of its own subsidiaries from entering a building to submit a bid, you know things have gotten really strange. And more importantly, you know the underlying business is under serious pressure.

That's exactly what happened earlier this month when staff from CTG Duty Free Corp. Ltd. (1880.HK) stopped two workers from Sunrise Duty Free Shanghai Co. from entering Shanghai Airport Group headquarters. The Sunrise employees were trying to submit bids to continue operating duty-free shops the company had managed for 26 years at Shanghai's two major airports. The twist? CTG owns a majority stake in Sunrise and had already used its board control to vote against Sunrise making the bid in the first place.

The Sunrise workers eventually managed to submit their paperwork anyway. But CTG wasn't done. The parent company then submitted an official withdrawal on Sunrise's behalf, getting the bid disqualified. In the end, CTG was one of two companies to win licenses from the Shanghai airport authority, effectively evicting its own subsidiary from its longtime position at Pudong and Hongqiao airports.

Investors initially loved the hardball tactics, sending CTG's Hong Kong and Shanghai-listed shares up 3% when the company publicly announced winning the contracts on December 17. But the rally fizzled within days as reality set in: this development, while important, won't fix CTG's fundamental problems of slumping sales and shrinking profits.

A Virtual Monopoly That's Still Struggling

CTG Duty Free operates almost exclusively in its home China market, with just a handful of shops outside the mainland in Hong Kong, Macao, Tokyo, Singapore and Sri Lanka. The company enjoys a near-monopoly domestically with roughly 80% market share, thanks partly to periodic restrictions on foreign participation and partly to state backing.

Yet even with this massive home-field advantage, CTG has stumbled badly since the pandemic. Tourism in China, the biggest driver of traffic to its stores, has remained disappointingly sluggish even after pandemic restrictions ended in 2023. The company's willingness to bully its own subsidiary to secure the Shanghai Airport contract for itself looks like a symptom of deeper frustration with more fundamental issues plaguing the sector.

Beyond weak consumer demand, shifting local tastes have hammered demand for pricey foreign products like luxury goods, liquor and cosmetics as trendy domestic brands capture more market share. Consumers are increasingly gravitating toward experience-oriented shopping in brick-and-mortar stores and favoring homegrown brands.

CTG's financial results tell the painful story. In 2024, revenue declined 16% to 56.5 billion yuan ($8 billion), while net profit plunged 36% to 4.32 billion yuan, representing the company's largest drop in recent years. The slide continued through the first three quarters of this year, with revenue falling 7.34% to 39.9 billion yuan and net profit down 22% to 3 billion yuan.

This performance stands in stark contrast to the global duty-free market, which is still enjoying a gradual post-pandemic rebound. The worldwide market grew 3% year-over-year to $74.1 billion last year. Trying to calm nervous investors, CTG announced its first-ever interim dividend in October and approved a share repurchase plan.

Searching for New Growth

While winning the contract to directly operate stores at Shanghai's two main airports should provide a modest boost to top-line revenue, the Sunrise dispute raises bigger questions about the future growth potential of China's duty-free shopping market, which was worth 71.6 billion yuan last year. With airport and rail hubs now largely saturated, CTG and competitors have turned their attention to downtown stores in major cities, targeting a broader audience of travelers with services like online-to-offline shopping.

CTG's 200 retail shops make it the largest duty-free chain in China. But the company faces a new challenge: China recently decided to allow foreign operators back into the sector after shutting them out in 2019.

Sunrise itself reflects the bumpy road for foreign investment in this space over the past three decades. The company, now 51% owned by CTG, was the first foreign enterprise allowed into the highly regulated sector in 1999 and has long been viewed as an international standard setter in the Chinese industry. For years it was the only duty-free operator with stores at China's three major aviation hubs in Shanghai's Pudong and Hongqiao airports plus Beijing's Capital Airport. But Sunrise's grip on Shanghai looked vulnerable after the airport authority changed its bidding rules earlier this year to prevent the same entity from repeatedly winning concessions.

In the final outcome, CTG won the tender to operate two sites at Pudong and Hongqiao airports, while a third concession went to global travel retailer Avolta.

Still the Giant, But For How Long?

In many respects, CTG remains untouchable. According to its own data, the company controlled 78.7% of China's duty-free and travel retail market in 2024, far ahead of its nearest domestic rival, Hainan Development Holdings, which holds just 7.1% market share.

On December 18, Hainan officially became a Free Trade Zone with a two-tiered system allowing free trade between the island and areas outside China while maintaining customs controls for imported goods traveling between the zone and the Chinese mainland. Current duty-free license holders will retain their licenses under the new system.

CTG's Hong Kong stock is up 27% this year, matching similar gains for the benchmark Hang Seng Index, suggesting investors haven't completely lost faith. Analysts also lean cautiously optimistic, forecasting the company's revenue declines could continue moderating in the fourth quarter as it returns to profit growth.

The launch of Hainan as a Free Trade Port may breathe new life into duty-free shopping on the island, boosting CTG's business in that critical market. Citic Securities maintained its "buy" rating on the company following the December Sunrise incident, while CICC kept its "outperform" rating and raised its target price. Huaxi Securities believes CTG's operations are bottoming out and beginning to recover.

But not everyone is convinced. Zhengxing Institutional Research sees limited upside for the stock without better profit performance, arguing the company's current price-to-earnings ratio of 39 is already higher than the industry average.

The unusual corporate drama with Sunrise might have won CTG some valuable airport real estate, but it also exposed just how desperate things have become in China's duty-free sector. When you're fighting your own subsidiaries for contracts, that's less about strength and more about survival.