Asian Equities Analyst, Logistics & Transport, Tracking Traffic

Daniel Hellberg

Asian Equities Analyst, Logistics & Transport

Tracking Traffic

Focusing on Asian logistics, transportation, and travel companies

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/zto-express" target="_blank" data-smartkarma-citation="entities:23628:1" rel="noopener">ZTO Express (ZTO US)</a> reported Q3 earnings results after the US close on Wednesday. While parcel volume and revenue both showed strong growth -- up 51% and 26% YoY, respectively -- core margins imploded and diluted net earnings per share fell about 10% versus Q3 2019. The collapse of ZTO's core express margins shows ZTO has fallen back to the pack it used to lead convincingly.We also note sharp YoY increases in gross profit from non-express activities, 'other operating income', and tax breaks, all of which flattered the company's weak bottom line. Without these, we estimate net profit would have fallen by around a third in Q3. ZTO's growing reliance on 'other' items indicates worsening earnings quality, in our view. Despite these, ZTO continues to enjoy rich valuation multiples, which we believe is undeserved, given our expectation of continued margin pressure in 2021. We retain our SELL rating on ZTO.

ZTO Express (ZTO US) reported Q3 earnings results after the US close on Wednesday. While parcel volume and revenue both showed strong growth -- up 51% and 26% YoY, respectively -- core margins imploded and diluted net earnings per share fell about 10% versus Q3 2019. The collapse of ZTO's core express margins shows ZTO has fallen back to the pack it used to lead convincingly.We also note sharp YoY increases in gross profit from non-express activities, 'other operating income', and tax breaks, all of which flattered the company's weak bottom line. Without these, we estimate net profit would have fallen by around a third in Q3. ZTO's growing reliance on 'other' items indicates worsening earnings quality, in our view. Despite these, ZTO continues to enjoy rich valuation multiples, which we believe is undeserved, given our expectation of continued margin pressure in 2021. We retain our SELL rating on ZTO. 

ZTO Q3 Results: As Margins Implode, It's Coming 'Back To the Pack', Retain SELL

Equity Capital Markets

Kerry Express Thailand / Equity Capital Markets

In an updated filing, <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> indicated it could sell as many as 300 mn new shares in its planned IPO. Many media reports have suggested the company hopes to raise about US$300 mn in the offering, suggesting KEX will come to market at around 30 baht per share.In this note, we try to answer the following questions regarding KEX's valuation:<ul>
<li>What are the most useful 'comps' for KEX? </li>
<li>What are some appropriate valuation multiples to use in comparing KEX to peers?</li>
<li>How does KEX's valuation at 30 baht per share compare to the peer group we've identified?</li>
<li>What factors could support either a premium or discount valuation for KEX versus peers?</li>
</ul>At 30 baht per share (which implies market capitalization of US$1.7 bn), KEX would not be overvalued relative to peers, in our view, and there are reasons KEX could eventually demand a premium valuation relative to other express companies.

In an updated filing, Kerry Express Thailand (KEX TB) indicated it could sell as many as 300 mn new shares in its planned IPO. Many media reports have suggested the company hopes to raise about US$300 mn in the offering, suggesting KEX will come to market at around 30 baht per share.In this note, we try to answer the following questions regarding KEX's valuation:
What are the most useful 'comps' for KEX? 
What are some appropriate valuation multiples to use in comparing KEX to peers?
How does KEX's valuation at 30 baht per share compare to the peer group we've identified?
What factors could support either a premium or discount valuation for KEX versus peers?
At 30 baht per share (which implies market capitalization of US$1.7 bn), KEX would not be overvalued relative to peers, in our view, and there are reasons KEX could eventually demand a premium valuation relative to other express companies.

Kerry Express Thailand (KEX) IPO: Approach to Valuation

Event-Driven

<a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a> announced it will wind down its money-losing Store+ business line. The company had been considering strategic alternatives for Store+ for several quarters. In the US session on Monday, shares traded as high as US$3.65 before falling to US$3.18 at the close. The decision to close Store+ is positive at the margin, in our view. The unit was responsible for outsized adjusted EBITDA losses and added little to growth. The change should free up some working capital and allow management to focus on the Chinese express and freight segments. More importantly, eliminating Store+ (and its losses) makes Best more attractive to potential suitors. Best is likely to disclose operating losses when it reports Q3 results on November 19th. We believe any near-term weakness in the share price could provide an opportunity to add to positions on the expectation of M&amp;A activity in the next 12-18 months. Retain BUY

BEST Inc (BEST US) announced it will wind down its money-losing Store+ business line. The company had been considering strategic alternatives for Store+ for several quarters. In the US session on Monday, shares traded as high as US$3.65 before falling to US$3.18 at the close. The decision to close Store+ is positive at the margin, in our view. The unit was responsible for outsized adjusted EBITDA losses and added little to growth. The change should free up some working capital and allow management to focus on the Chinese express and freight segments. More importantly, eliminating Store+ (and its losses) makes Best more attractive to potential suitors. Best is likely to disclose operating losses when it reports Q3 results on November 19th. We believe any near-term weakness in the share price could provide an opportunity to add to positions on the expectation of M&amp;A activity in the next 12-18 months. Retain BUY

Best Inc. Is Closing Its Money-Losing 'Store+' Business, a Small but Positive Step Forward

In the September quarter, revenue growth at <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>'s logistics arm CaiNiao Network accelerated sharply, as the unit continued to grow faster than Alibaba, total eCommerce sales, and China's express market.How has CaiNiao Network managed to grow so much faster than eCommerce and associated logistics spending, and what does it mean for China's listed express companies?In this note we identify likely drivers of CaiNiao's superior sales momentum. We also explain the threat CaiNiao's strength poses to the five express companies in which Alibaba has invested.In our view, CaiNiao's growth will make it tougher for commodity-type express companies to breathe. These companies are already under pressure from declining margins and rising CapEx requirements. <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>, which operates mostly outside of Alibaba's orbit and is thus insulated from many of these problems, remains the most attractive name in Chinese express, in our opinion, but <a href="https://www.smartkarma.com/entities/best-inc" target="_blank" data-smartkarma-citation="entities:25494:1" rel="noopener">BEST Inc (BEST US)</a> is an interesting play on potential M&amp;A in the sector.

In the September quarter, revenue growth at Alibaba Group (BABA US)'s logistics arm CaiNiao Network accelerated sharply, as the unit continued to grow faster than Alibaba, total eCommerce sales, and China's express market.How has CaiNiao Network managed to grow so much faster than eCommerce and associated logistics spending, and what does it mean for China's listed express companies?In this note we identify likely drivers of CaiNiao's superior sales momentum. We also explain the threat CaiNiao's strength poses to the five express companies in which Alibaba has invested.In our view, CaiNiao's growth will make it tougher for commodity-type express companies to breathe. These companies are already under pressure from declining margins and rising CapEx requirements. S.F. Holding (002352 CH), which operates mostly outside of Alibaba's orbit and is thus insulated from many of these problems, remains the most attractive name in Chinese express, in our opinion, but BEST Inc (BEST US) is an interesting play on potential M&amp;A in the sector. 

As Growth Accelerates, Alibaba's CaiNiao Network Is Pushing Aside Commodity-Type Express Firms

Despite strong volume growth, Chinese express delivery firms <a href="https://www.smartkarma.com/entities/ningbo-xinhai-electric-co-ltd" target="_blank" data-smartkarma-citation="entities:10863:1" rel="noopener">Yunda Holding (002120 CH)</a>, <a href="https://www.smartkarma.com/entities/yto-express" target="_blank" data-smartkarma-citation="entities:20319:1" rel="noopener">YTO Express (600233 CH)</a>, and <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> all reported poor earnings results in Q3.
On a combined basis, Gross Margin for these three companies declined by over 500 bps YoY, to just 6.8%. The three companies' combined Gross Margins have fallen by about two-thirds since Q316.
With Operating Cash Flow declining sharply in recent periods, these companies will soon face a tough choice: raise debt or equity capital to fund CapEx, or cut back on investments. The first choice would smother future growth; the latter would undermine long-term competitiveness.
In contrast to the struggles of Yunda, YTO, and STO, <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>'s strategy of moving down-market to increase its share of inter-city parcel volumes continues to generate positive results. We retain our BUY rating on SF Holding on the expectation it can continue to profitably gain express market share in the medium-term.

Despite strong volume growth, Chinese express delivery firms Yunda Holding (002120 CH), YTO Express (600233 CH), and STO Express (002468 CH) all reported poor earnings results in Q3.
On a combined basis, Gross Margin for these three companies declined by over 500 bps YoY, to just 6.8%. The three companies' combined Gross Margins have fallen by about two-thirds since Q316.
With Operating Cash Flow declining sharply in recent periods, these companies will soon face a tough choice: raise debt or equity capital to fund CapEx, or cut back on investments. The first choice would smother future growth; the latter would undermine long-term competitiveness.
In contrast to the struggles of Yunda, YTO, and STO, S.F. Holding (002352 CH)'s strategy of moving down-market to increase its share of inter-city parcel volumes continues to generate positive results. We retain our BUY rating on SF Holding on the expectation it can continue to profitably gain express market share in the medium-term. 

Bad, Worse, & Worst | Ugly Q320 Results from Yunda, YTO Express, & STO Express

China

YTO Express Group Co., Ltd. provides global express services. The Company also provides general cargo warehousing, domestic air transport agency, car rental, supply chain management, and other related services throughout China..

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YTO Express (600233 CH)

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