Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Event-Driven

Earlier this week, <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a> and <a href="https://www.smartkarma.com/entities/yto-express" target="_blank" data-smartkarma-citation="entities:20319:1" rel="noopener">YTO Express (600233 CH)</a> became the first two Chinese express companies to report Q320 results.Market leader SF Holding continued its recent winning streak in Q3, with Revenue, Gross Profit, and Net EPS climbing YoY by 34%, 25%, and 52%, respectively.Meanwhile, YTO Express struggled: Revenue was up 15% YoY on strong volume gains, but Gross Profit declined by 30% YoY and Net EPS fell by 29%. We expect similarly weak results from the other four listed Chinese express companies when they report Q3 earnings in the coming weeks. More interesting than the two results themselves is that SF Holding continues to increase its share of the express sector's Gross Profits. From about half of the total in 2017-19, SF Holding's share of the total jumped to over 70% of the total in the first three quarters of 2020. Superior profitability matters: it allows SF Holding to invest aggressively in new technologies that should expand its lead over the other express companies. Smaller express companies with declining profitability increasingly face an array of tough choices that include new equity fundraising, CapEx cuts, and lower service quality. We believe SF Holding will continue to extend its lead over the rest of the sector, and maintain our BUY rating on the stock. A better way to play sector consolidation, however, could be through <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a>, a small-cap player that could become a potential acquisition target.

Earlier this week, S.F. Holding (002352 CH) and YTO Express (600233 CH) became the first two Chinese express companies to report Q320 results.Market leader SF Holding continued its recent winning streak in Q3, with Revenue, Gross Profit, and Net EPS climbing YoY by 34%, 25%, and 52%, respectively.Meanwhile, YTO Express struggled: Revenue was up 15% YoY on strong volume gains, but Gross Profit declined by 30% YoY and Net EPS fell by 29%. We expect similarly weak results from the other four listed Chinese express companies when they report Q3 earnings in the coming weeks. More interesting than the two results themselves is that SF Holding continues to increase its share of the express sector's Gross Profits. From about half of the total in 2017-19, SF Holding's share of the total jumped to over 70% of the total in the first three quarters of 2020. Superior profitability matters: it allows SF Holding to invest aggressively in new technologies that should expand its lead over the other express companies. Smaller express companies with declining profitability increasingly face an array of tough choices that include new equity fundraising, CapEx cuts, and lower service quality. We believe SF Holding will continue to extend its lead over the rest of the sector, and maintain our BUY rating on the stock. A better way to play sector consolidation, however, could be through BEST Inc (BEST US), a small-cap player that could become a potential acquisition target. 

Divergent Q320 Results from SF Holding & YTO Express Show Pressure to Consolidate Is Building

Equity Bottom-Up

After moderating in August, headline express sector volume surged in September. Total parcel volume grew by 44.6% last month, and key inter-city volume was up almost 50%. 
Pricing remains weak, however. For all express shipments, ASPs fell by 12.2%, and the companies that report monthly numbers all reported YoY ASP declines of between 15% and 31%.
In other express sector news: <a href="https://www.smartkarma.com/entities/zhejiang-idc-fluid-control-co-ltd" target="_blank" data-smartkarma-citation="entities:18695:1" rel="noopener">STO Express (002468 CH)</a> pre-announced Q3 losses, we check on how <a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a>'s Hong Kong IPO has fared so far, and we note (again) <a href="https://www.smartkarma.com/entities/maanshan-dingtai-rare-a" target="_blank" data-smartkarma-citation="entities:4128:1" rel="noopener">S.F. Holding (002352 CH)</a> massive scale relative to its Chinese peers -- and it's incredible year of growth. 
We continue to rate SF Holding BUY as we expect it to continue to gain share from peers. We also recently upgraded <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US) </a>to BUY on our expectation that it could become an attractive target once sector M&amp;A takes off. Meanwhile, ZTO remains a SELL in our view.

After moderating in August, headline express sector volume surged in September. Total parcel volume grew by 44.6% last month, and key inter-city volume was up almost 50%. 
Pricing remains weak, however. For all express shipments, ASPs fell by 12.2%, and the companies that report monthly numbers all reported YoY ASP declines of between 15% and 31%.
In other express sector news: STO Express (002468 CH) pre-announced Q3 losses, we check on how ZTO Express (ZTO US)'s Hong Kong IPO has fared so far, and we note (again) S.F. Holding (002352 CH) massive scale relative to its Chinese peers -- and it's incredible year of growth. 
We continue to rate SF Holding BUY as we expect it to continue to gain share from peers. We also recently upgraded BEST Inc (BEST US) to BUY on our expectation that it could become an attractive target once sector M&amp;A takes off. Meanwhile, ZTO remains a SELL in our view. 

TRACKING TRAFFIC/Chinese Express: Pricing Still Weak | STO Q3 Profit Warning | ZTO HK IPO Update

Last week <a href="https://www.smartkarma.com/entities/zhejiang-idc-fluid-control-co-ltd" target="_blank" data-smartkarma-citation="entities:18695:1" rel="noopener">STO Express (002468 CH)</a> warned investors that it lost money in Q3 2020, versus profits in the year-earlier period. It was the third profit warning issued by the company so far in 2020. 
STO Express appears to be retreating from its aggressive pursuit of volume share gains, but the company's new strategy remains unclear, in our view. 
We believe STO Express remains a potential acquisition target when Chinese express sector M&amp;A gains momentum, along with US-listed <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a>.

Last week STO Express (002468 CH) warned investors that it lost money in Q3 2020, versus profits in the year-earlier period. It was the third profit warning issued by the company so far in 2020. 
STO Express appears to be retreating from its aggressive pursuit of volume share gains, but the company's new strategy remains unclear, in our view. 
We believe STO Express remains a potential acquisition target when Chinese express sector M&amp;A gains momentum, along with US-listed BEST Inc (BEST US). 

As Profits Turn to Losses, STO Express Retreats from Growth Strategy. Is M&A Next?

Equity Capital Markets

The purpose of this note is to analyze the different eCommerce fulfillment markets pursued by <a href="https://www.smartkarma.com/entities/kerry-express-thailand" target="_blank" data-smartkarma-citation="entities:29253:1" rel="noopener">Kerry Express Thailand (KEX TB)</a> and <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US).</a> KEX focuses on Thailand's domestic express market, while Best has a competing domestic service and is also developing a X-border express service to quickly move Chinese goods into multiple SE Asian markets.To better understand these two markets, we looked at market data from KEX's IPO documents as well as financial data disclosed by eCommerce giant <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>. These figures, combined with numbers from KEX itself and the Chinese express companies, give investors a sense of the size and growth potential of the Thai domestic and X-border eComm fulfillment markets.While both markets offer attractive growth, they also present distinct challenges. In the Thai domestic express market, these challenges include a lack of scale (compared to China's expess market) and relatively low population density, especially outside of Metro Bangkok. Challenges presented by the X-border market include exorbitant pricing, competition from large multinationals, and increased complexity (ie, paperwork, customs, tariffs, etc). We conclude that KEX is an intriguing pure play on Thailand's eCommerce development whose upcoming IPO is worth following. Regarding Best, we recently upgraded its shares to Buy on expected sector consolidation. To date its Thai and X-border revenues remain a very small part of the company's business which probably won't "move the needle" in the near-term.

The purpose of this note is to analyze the different eCommerce fulfillment markets pursued by Kerry Express Thailand (KEX TB) and BEST Inc (BEST US). KEX focuses on Thailand's domestic express market, while Best has a competing domestic service and is also developing a X-border express service to quickly move Chinese goods into multiple SE Asian markets.To better understand these two markets, we looked at market data from KEX's IPO documents as well as financial data disclosed by eCommerce giant Alibaba Group (BABA US). These figures, combined with numbers from KEX itself and the Chinese express companies, give investors a sense of the size and growth potential of the Thai domestic and X-border eComm fulfillment markets.While both markets offer attractive growth, they also present distinct challenges. In the Thai domestic express market, these challenges include a lack of scale (compared to China's expess market) and relatively low population density, especially outside of Metro Bangkok. Challenges presented by the X-border market include exorbitant pricing, competition from large multinationals, and increased complexity (ie, paperwork, customs, tariffs, etc). We conclude that KEX is an intriguing pure play on Thailand's eCommerce development whose upcoming IPO is worth following. Regarding Best, we recently upgraded its shares to Buy on expected sector consolidation. To date its Thai and X-border revenues remain a very small part of the company's business which probably won't "move the needle" in the near-term. 

Kerry Express & Best Inc: Two Approaches to ECommerce Logistics Growth in SE Asia

We are upgrading <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a> from HOLD to BUY on the expectation of Chinese express sector consolidation in the coming 12-18 months. Note that we do not expect sector fundamentals to improve in the near-term, nor do we expect Best to erase its losses in the next few quarters. 
While we concede we may be early in rating Best BUY, we believe conditions are developing in ways that make sector M&amp;A more likely in the medium-term. Given its size, its depressed valuation and its relationship to <a href="https://www.smartkarma.com/entities/alibaba-group-holding-ltd" target="_blank" data-smartkarma-citation="entities:787:1" rel="noopener">Alibaba Group (BABA US)</a>, Best could become an acquisition target. 
We view Best as a cheap option on sector consolidation. At a 20% discount to peers on [EV/Revenue] and [EV/Parcel], we believe Best's express operation alone is worth US$5.05 per ADS -- investors effectively get the rest of its businesses for free. BUY below US$3 for ~70% upside.

We are upgrading BEST Inc (BEST US) from HOLD to BUY on the expectation of Chinese express sector consolidation in the coming 12-18 months. Note that we do not expect sector fundamentals to improve in the near-term, nor do we expect Best to erase its losses in the next few quarters. 
While we concede we may be early in rating Best BUY, we believe conditions are developing in ways that make sector M&amp;A more likely in the medium-term. Given its size, its depressed valuation and its relationship to Alibaba Group (BABA US), Best could become an acquisition target. 
We view Best as a cheap option on sector consolidation. At a 20% discount to peers on [EV/Revenue] and [EV/Parcel], we believe Best's express operation alone is worth US$5.05 per ADS -- investors effectively get the rest of its businesses for free. BUY below US$3 for ~70% upside. 

Upgrading Best Inc To Speculative BUY on Expectation of Express Sector Consolidation

China

BEST Inc. offers logistics and supply chain management solutions. The Company provides express and freight delivery, inventory management, warehousing, financing, cross-border supply chain, merchandise sourcing, and value-added services. BEST serves customers worldwide.

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BEST (BEST US)

Divergent Q320 Results from SF Holding & YTO Express Show Pressure to Consolidate Is Building

SF Holding posted another set of strong results in Q3, while BABA-aligned YTO Express struggled (again). Our view: SF Holding's rising share of...

Tracking Traffic

TRACKING TRAFFIC/Chinese Express: Pricing Still Weak | STO Q3 Profit Warning | ZTO HK IPO Update

Although volumes bounced back in September, pricing remains weak. We retain our BUY ratings on SF Holding and Best Inc, while ZTO Express remains a...

Tracking Traffic

As Profits Turn to Losses, STO Express Retreats from Growth Strategy. Is M&A Next?

STO Express recently warned investors it would report a loss in Q3 2020. The company seems to be rethinking its aggressive pursuit of volume share,...

Tracking Traffic

Kerry Express & Best Inc: Two Approaches to ECommerce Logistics Growth in SE Asia

Define market opportunity: domestic Thailand (KEX

Tracking Traffic

Upgrading Best Inc To Speculative BUY on Expectation of Express Sector Consolidation

What is rationale? What are catalysts? Why Best and not other potential targets? Price target?

Tracking Traffic

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