BEIJING - Shanghai International Airport Co, the world's fourth-largest listed airport operator by market value, has seen its shares rally despite cooling passenger traffic growth. Now, its duty-free shops hold the key for investors to determine if the stock deserves a valuation premium.

Shares of the operator of the Shanghai Pudong International Airport, the Chinese mainland's second-largest by passengers, have almost doubled since the start of 2017, driven by steady earnings growth. That compares with a 1 percent drop for the broader Shanghai stock index, and a 51 percent gain at Hong Kong-traded Beijing Capital International Airport Co.

Beijing Capital International Airport said in its report that the income growth of the non-aviation sector mainly comes from the growth of duty-free retail business. Income from advertising and catering has also helped to boost the airport's revenue growth.

"With the constant increase of Chinese tourists who travel abroad, it's necessary to launch more duty-free stores at those airports in major and second-tier cities," said Zhu Weilong, an analyst at Kent Ridge Consulting.

As one of the most popular Shanghai-listed A shares among foreign investors, the company is trading at 24 times earnings over the next 12 months, the highest among listed airports in China and above its average multiple of 19 times over the past two years, according to data compiled by Bloomberg. The stock is already trading near analysts' 12-month consensus target of 54 yuan ($8.43).

"There's just too much exuberance in the past year given market expectations of increased flights, rising non-aeronautical revenue and earnings growth, and the stock's inclusion in the MSCI," said Corrine Png, CEO of Singapore-based independent research firm Crucial Perspective Pte.

Shanghai Airport is among more than 200 Chinese A-share companies to be included in the MSCI index, a move likely to attract more overseas buying. But Png said most of the positive catalysts have been priced in and a significant correction will come even at minor "earnings disappointment".

Analysts are already expecting the company's profit growth to decelerate this year, according to Bloomberg data. Their consensus estimated annual earnings growth for Shanghai Airport would be 14 percent over the next three years, below its average annual growth of 19 percent over the past five years.

To be sure, compared with many of its peers, Shanghai Airport boasts stronger profitability and growth prospects. Its trailing 12-month sales grew 17 percent year-on-year, still beating 84 percent of its peers, according to data compiled by Bloomberg. Its trailing 12-month earnings growth of 33 percent is higher than 68 percent of those peers, while it is still trading at a steep discount to overseas airport operators like Sydney Airport and Airports of Thailand PCL.

China Daily - Agencies